– USD sell-off to persist, market waiting for a short-USD catalyst
We expect the US dollar to continue a depreciating trend over the weeks and months ahead. This is despite the lack of a clear directional move in the dollar at the beginning of this week. The Fed’s commitment to maintain easy monetary policy is to be the main driver in FX markets over the months ahead, but for now the market has lacked a catalyst for further big moves. On Tuesday NY Fed’s Dudley, Chicago Fed’s Evans and Richmond Fed’s Lacker speak, which will provide inside into how reactive the USD may be to individual Fed speak in light of the aggressive language used in the FOMC statement. Dudley is likely to support the statement, while Lacker, who dissented in last weeks FOMC decision, may express his reservations about the Fed’s new QE program. The rise in the US 10-year inflation breakeven to 2.6% from 2.4% suggests that the bond market would concur with any inflationary warnings put forward by Lacker. However, last week’s FOMC statement made it clear that the Fed is committed to making progress on its growth and employment mandate. We particularly highlight that the statement that “the Committee expects that a highly accommodative stance of monetary policy will remain appropriate for a considerable time after the economic recovery strengthens” should cause investors to continue to sell the USD and buy risk assets. We continue to favour long NZDUSD where we target a move to 0.8470. Looking ahead there is plenty of scope for investors to build short USD positions and enter risk-on trades.
– Dovish Riksbank minutes to drive NOKSEK higher
We expect the Riksbank’s minutes on Tuesday to be dovish by indicating that monetary policy may be eased further going forward. Such a stance should further support to our long NOKSEK position. Following last week’s soft Swedish data – the downward revision to the Q2 Swedish GDP and weak inflation – the ratio of 2-year swap rates for NOKSEK continues to indicate substantial short-term upside to NOKSEK (see chart). In the current FX Weekly we reiterate our long NOKSEK trade recommendation targeting 1.1700.
– UK inflation and German ZEW likely to disappoint expectations
Our economists forecast Tuesday’s UK CPI release for August to be softer than market expectations. Core CPI is expected to print 1.8% y/y vs 2.2% expected and a prior reading of 2.3%. A soft inflation reading is likely to entrench expectations of further QE by the BoE in November, and even re-ignite expectations of a rate cut. We expect that any pullback in GBP is likely to be temporary, particularly vs the USD, as typically QE from the BoE has not led to a weaker GBP. On the contrary, we expect cable to rally above 1.70 by year end on the UK’s relatively favourable growth outlook. Meanwhile, the German ZEW survey is likely to disappoint market expectations on Tuesday and weaken due the uncertainty surrounding the Constitutional Court’s rules at the time of the survey was taken.
– RBA minutes likely to be natural, allowing the AUD to benefit from the USD’s decline
The RBA’s MPC minutes published overnight were the slightly dovish side of neutral. The bottom line appears to be that the RBA is prepared to respond to a “significant deterioration” in the growth outlook, but for now the economy is growing in line with trend and the RBA’s inflation mandate is being met. The board discussed the impact of the AUD and concluded that “the exchange rate was weighing more heavily on the economy than might be expected”. While this has prevented investors from buying AUD for now, we expect the impact of a weaker USD from the Fed’s QE3 to drive AUDUSD higher. Nevertheless, we do favour long NZDUSD as the trade to capture a broad weaker USD trend.
BNP Paribas