– EURUSD hits 1.28 target. We lock in profit but maintain long EURJPY and EURCHF
The combination of rising expectations for QE and the “europhoria” post-ECB pushed EURUSD above 1.2800. Given that we hit our target, we took profit on our long EURUSD recommendation and booked a 3.92% profit. We remain bullish on EURUSD and forecast 1.30 by the end of September. We maintain our long EURJPY and EURCHF recommendations as a way to play our bullish EUR view. ECB Chief Mario Draghi delivered on the details of the new bond buying program and assured markets that the ECB, in fact, is ready to step in when it is called to do so. But, with Draghi put well in place, political events this week may augment the EUR rally. On 12 September, the German Constitutional Court will reveal its decision on the constitutionality of the euro bailout fund. Previous decisions from this court referred significant decisions to the German Parliament rather than declare decisions as unconstitutional. We do not see any sort of change on this ruling, leaving the EUR well on its way to move higher. In addition, the European Union will reveal its banking union plans on that day. With eurozone risks abating and sovereign risk premia decline, our bullish EUR view remains well intact.
– Payroll report sets the stage for Fed QE3 response
A QE-friendly payroll report weakened the USD against all G10 currencies on Friday. Non-farm payrolls rose a mere 96k for the month of August. The unemployment rate dropped to 8.1% from 8.3% on the back of the 0.2ppt decline in the participation rate, which fell to the lowest level since 1981. The report strongly verifies the concerns Fed Chairman Ben Bernanke raised in his Jackson Hole speech regarding the underutilisation of human capital, which could permanently result in lower economic growth. The report is consistent with the recent spending data that may not point to a recession, but also do not suggest an acceleration of growth. Thus, our economists continue to expect an announcement of another round of asset purchases (both MBS and Treasuries) at the FOMC meeting on 13 September. Even if the Fed delays the announcement until later in the year, we would expect them to extend the forward guidance until mid-2015. Whatever the policy tool the Fed decides to execute, USD weakness should resume, especially against the commodity currencies. According to our analysis, a majority of investors remain neutral to long USD, which implies that there is plenty of scope for USD weakness once the Fed decides to ease policy further.
– Chinese data disappoints….EURAUD to rally but AUDUSD to be supported by QE3
August activities data suggests Chinese economy is edging towards the bottom, without signs of imminent recovery. The 8.9% IP growth is consistent with 7% GDP growth, clearly below official bottom line. FAI growth, the most important variable to stabilize growth, softened as the rebound in property and infrastructure was more than offset by the weakness in manufacturing. In this context, we expect more fiscal stimulus to aid exports and support infrastructure, as President Huurged. While an interest rate cut is likely to be delivered in the near term to strengthen confidence, a steady rise in inflation indicates the time window is rather narrow, and continued rebound in property prices also adds to the difficulties to cut interest rate. Both the Bank of Canada and RBA expressed concerns over the Chinese economy and the impact on the global economy. So far in Q3, China has been weak and suggests that the data has not bottomed. The outlook for AUD will be in balance – disappointing Chinese data will increase market expectations for a rate cut from the RBA. Currently, the market is pricing in less than a 50% chance of a cut at the next meeting and about 90bp of cuts by the end of the year. AUDUSD should remain supported by the prospects of QE3, but EURUSD should continue to rebound.
BNP Paribas