– Draghi delivers, EURUSD to continue its march towards 1.2800
It is clear from the market reaction following the ECB meeting yesterday that the outcome has presently surprised, even though . Stocks are continuing to trade higher (financials still outperforming), Spanish 10Y bonds have continued to rally (30bps following from 40bps yesterday). For FX, implied volatility has fallen across the curve. In spot FX, we continue to maintain our view that the EUR can continue to rally. So far this rally has lagged that of eurozone sovereigns, suggesting that there is plenty of scope for further upside. Furthermore the market still remains short the EUR. More of these positions are likely to be squeezed over the sessions ahead. German FM Schaeuble and Italy’s Monti both welcomed the ECB’s new framework, a positive in our view. Next week’s principle European event (12 September) will be the announcement by the German Constitutional court on whether the Euro Bailout Fund is unconstitutional. We do not envisage that this will be the case so the outcome of this event will be EUR-positive. We also expect next week’s banking union plans to provide further support to the EUR. We therefore continue to hold onto our long EUR recommendations via EURUSD and EURJPY, and have added in this week’s weekly long EURCHF.
– NFP unlikely to trigger concerns about delivery of QE3; remain long risk
The better-than-expected ADP employment release and the employment component of non-manufacturing ISM have caused our economists to revise higher their NFP forecast to 125k (from 100k), slightly below consensus expectations of 130k. We would expect a release in the region to provide support to the commodity currencies, especially CAD. While such a release would indicate reasonable employment growth, this would not be to the extent that the outlook for QE3 at next week’s FOMC meeting is at risk of being pared back.
– Unfavourable China data mix could constrain AUD for now, but QE3 a catalyst for a re-bound
Asian markets have rallied overnight, appearing to shed China concerns ahead of key data early next week. Our China economist points out that the risks are for an unfavourable mix, with a weaker industrial production print (growth at threeyear low) and CPI likely to have bottomed at 1.8% y/y in July. Overnight the AUD rallied despite disappointing Australian trade data, highlighting that with long positions having been reduced, risk-appetite is more important than domestic data for the AUD. AUD and NZD may continue to lag the CAD over the days ahead, but an announcement of QE3 at the FOMC on Thursday is likely to trigger AUD and NZD to catch up as investors re-establish long AUDUSD and NZDUSD positions.
– Recommending long EURCHF targeting a rise to 1.2500
We have initiated a long EURCHF recommendation targeting a move to 1.2500 over the next three months. Eurozone fiscal concerns have eased considerably and we view that the move of the cross off its floor is the start of a sustained move higher. Draghi’s announcement of a new bond purchasing framework is a supportive factor for our outlook for EURCHF moving higher. Meanwhile, we expect that the SNB can continue to defend its floor if required, which means that long EURCHF provides and attractive risk-reward. See “Long EURCHF – Times are Changing” in FX Weekly for further details.
– NOKSEK to move higher, Norwegian data on Friday to be supportive
NOKSEK failed to hold onto its gains following the Swedish Riksbank’s unexpected cut on Thursday. While this move effectively front loads the cuts that were increasingly priced in, 2 year swap differentials continue to indicate NOKSEK moving higher. Furthermore, BNP Paribas economists view that the Riksbank will cut rates again by 25 bps before the end of the year. We continue to recommend long NOKSEK positioning targeting a rise to 1.1700.
BNP Paribas