* Sharp rally in NOKSEK is set to continue. We target 1.17.
Our long NOKSEK recommendation is showing some signs of life with a large move higher to break above its 55 dma (1.1449). A sustained close above that level today would target a move to its 200 dma (1.1639) – well on its way to our target at 1.17. NOKSEK’s strong performance has largely been on the on the back of weak Swedish data, but this was further augmented by the Norges Bank’s policy statement, which struck a hawkish tone regarding domestic economic conditions. We forecast a Norges Bank rate hike in Q1 2013. Today’s scheduled release of the Norwegian unemployment rate has been delayed until tomorrow. It is expected to decline and should keep the positive NOK momentum on track.
* China says willing to buy EU bonds and will step up talks with the EU
A slew of eurozone comments this morning have been broadly EUR supportive while the release of economic sentiment indicators shows the ongoing deterioration of the eurozone economy. Economic Sentiment fell from 87.9 in July to 86.1 in August. The weakening economy is consistent with BNP Paribas’ call for a further 25 bps rate cut from the ECB at next week’s policy meeting. In addition, the Italian bond auction this morning was successful with strong bid-to-cover ratios and overbidding for both 5yr and 10 yrs. Strong comments from Chinese Premier stating that his country stands ready to purchase more EU bonds despite the crisis in Europe is the strongest sign of support for the eurozone in several months. Markets will wait for further information from the ECB on what their plan is for supporting the sovereign bond markets. We continue to believe that sovereign risk premia remains the driver for the EUR; as such, the risks are to the upside. We reiterate our long EURUSD and EURJPY positions.
* Positive New Zealand data provides some relief to NZD. Further gains ahead
The NZD has struggled over the last few sessions, as the market turned increasingly bearish on the Chinese economy. However, today’s rise in both August’s RBNZ activity outlook (24.0 to 26.4) and RBNZ business confidence (15.1 to 19.5) has bolstered the NZDUSD and could sustain further gains especially if Bernanke signals further easing on Friday as we believe. We target 0.84 by end of Q3. The economic performance of New Zealand coupled with the relatively high yield attracts those investors who are seeking yield. Non-resident bond holdings continue to rise.
* While US data may improve, the outlook on the US is unlikely to change
While yesterday’s second advance estimate of US GDP reaffirmed that economic growth remains sub-trend at 1.7%q/q saar, today’s nominal personal spending should see the biggest monthly increase since February, rising by 0.4%m/m. This is likely to be due to a healthy increase in core retail sales in the month and strong services spending. Personal income is forecast to increase 0.3% in July, after rising 0.5% in June. Income is growing slower than spending, which means that the personal savings rate is likely to decline. Also, the initial jobless claims number is expected to drop slightly. Despite the positive data, we continue to expect Chairman Bernanke to signal another round of quantitative easing, substantiating the most recent and very dovish FOMC minutes. We remain bearish on the USD, and expect commodity currencies and the EUR to benefit on the back of this. After being stopped out of our discretionary long AUDUSD trade, we established a long AUDUSD trade, targeting 1.0545, based on the BNP STEER model. The model showed that the recent decline in AUDUSD is not justified by underlying fundamentals.
BNP Paribas