– Economic data flow picks up after a quiet week: EZ PMIs and Spanish auctions today
The USD has continued its rebound during Thursday’s session in Asia. This is despite positive newsflow out of China with a slight pick-up in the HSBC PMI Manufacturing survey (albeit remaining sub-50) and an announcement of the 18th party congress which should remove some of the political uncertainty. Stronger-than-expected NZ Q2 GDP (at 0.6% q/q vs 0.4% expected) supports our long NZDUSD recommendation but risk-off sentiment is weighing on the cross. We view the current strength in the USD as an opportunity to sell into. In Europe, eurozone flash PMI’s will provide the first indication of whether the pick-up of sentiment in financial markets has fed through to the real economy. We expect moderate increases in both the manufacturing and services surveys, but for these to remain in sub-50, recessionary, territory. Any upside surprise is likely to lead to investors buying the current dip in EURUSD, similar to the support provided to the cross on Wednesday. Investor focus on Thursday will also be on Spain’s three and ten year auctions. Slightly conversely, a poor auction result may be a positive for the EUR as it would boost the incentive for Spain to ask for assistance sooner rather than later. We expect that ongoing uncertainty around Spain seeking a bailout is causing some investors to maintain their short EUR positioning. Meanwhile, deferred consumer spending around the Olympics is likely to cause UK retail sales to be soft – our economist forecasts a decline of 0.8% m/m vs consensus of -0.3%. Combined with Wednesday’s dovish MPC minutes, a soft release is likely to cause the GBP to continue to underperform against the EUR and USD after its recent outperformance.
– Thursday’s Fed speak to be dovish; the short USD trade to gain traction in the market
Following on from very dovish Fed speak from Dudley and Evans on Tuesday, further Fed speakers on Wednesday are likely to reiterate that the Fed is likely to be maintaining very loose monetary policy for some time (our economists expect QE3 to be in place until the end of 2013 and lead to around USD1.7bn of balance sheet expansion). Most focus is likely to be on Lockhart and Pianalto, who are both voters on the FOMC. Rosengren, Kocherlakota and Bullard speak too but are currently non-voters. Many investors are likely to have been disappointed by the subdued prices action following the Fed’s aggressive announcement. With positioning in the USD currently broadly neutral, we highlight that there is plenty of scope for the USD to weaken as investors use it as a funding currency for risk-on positions. Once momentum in short USD trades gain some traction, USD crosses may move quickly as investors build new risk-on positions.
– NOKSEK declines to our take profit level, we book a 0.80% profit
The continuation of this week’s rally in SEK, which comes despite recent soft Swedish data and dovish Riksbank minutes, has caused NOKSEK to decline to our take profit level at 1.1400. We book a profit of 0.8% having entered the trade on 9 Aug at 1.1310. As we have been highlighting recently, the ratio of 2-year swap rates for NOKSEK is indicating to substantial short-term upside to the cross. However, now that the cross has traded below 1.1414 – a pivotal technical support level – the technical picture for the cross has turned bearish with the next support at 1.1359. For now, the risk-reward of being long NOKSEK has been diminished.
BNP Paribas