FX Daily Strategist: Europe

-USD weakness comes into play ahead of FOMC on Thursday…we target NZDUSD higher

USD weakness has taken hold of the FX markets as investors position for a positive outcome from the German Constitutional Court and the announcement of Fed QE3 at the Thursday FOMC Meeting. It seems that investors are becoming more convinced about the idea that the Fed may initiate another round of QE on Thursday. The NZD and the AUD have become the outperformers. We have noted that according to our analysis, investors remain neutral to long USD and that the FX market is not positioned for QE3 on Thursday. As such, USD weakness has further to go if the Fed, in fact, does pull the QE trigger. We added to our short USD exposure via long NZDUSD at 0.8150 yesterday, targeting 0.8470. In addition, we added a relative value trade based on our STEER model, long NZDCAD targeting 0.8190. According to our model, NZDUSD appears cheap, while CAD is overbought, signalling that USDCAD is vulnerable to a move higher.

– All eyes on the German Constitutional Court decision

The focus today turns to the German Constitutional Court decision, which will be announced at 11am BST. Our economists expect the German Constitutional Court will deliver a positive result on the ESM and the fiscal compact, which means it would become operational soon. However, one caveat exists: The court approval could come with a conditionality that we think could come in the form of putting conditions on any further acts of European integration and possibly requiring amendments to Germany’s national law. Nevertheless, the approval should provide support for the EUR. Also on the agenda today is an EU meeting on the banking union plans. They are likely to reveal the single supervisory framework in which the ECB would cover all banks. However, the Germans oppose the idea of the ECB supervising all banks. Thus, the December deadline for approval on this is unlikely to be met. Political risks may linger, but market systemic risks have significantly abated, given the ECB’s readiness to act. We continue to remain bullish on EURUSD (target 1.30 by end Q3) and hold long EURJPY and EURCHF.

– Cable rally could continue on better employment data

Cable rallied well above 1.600 after the release of the UK trade data for the month of July, which showed a marked improvement in the trade deficit. While the July data thus far has provided a silver lining for the UK and suggests that the UK should emerge from recession in the third quarter, the economy still remains flat. The rally in GBPUSD will likely be augmented by today’s labour market data, which are expected to show a decline in claimants counts. The momentum in the labour market data remains positive, but given the underlying weakness in the UK economy, such momentum will be difficult to sustain. Barring domestic fundamentals, we continue to see further upside for GBPUSD on the back of our expectations of QE3 from the Fed on Thursday. Also this morning, consumer confidence data out of Australia is forecast to deteriorate for September vs the previous month. The recent labour market report disappointed and will likely weigh on consumer confidence. Thus, the AUD may retrace some of its gains on the back of this release.

– RBNZ meeting on the calendar for 13 September

The RBNZ meeting on 13 September will likely keep policy rates on hold. While the RBNZ should acknowledge the strength of the domestic economy, it is likely to express its concerns over the weakness in the Chinese economy and the strength of the NZD. Since the beginning of June, NZDUSD rose nearly 10%; with QE3 in the pipeline, NZDUSD upside should resume.


BNP Paribas