– Political risks result in a modest risk-off tone at the beginning of the week
A modest risk-off tone dominates at the beginning of the week with broad-based losses seen in share markets, and with high-beta currencies in the red. Political risk, including China-Japan tensions and uncertainty on whether Spain will seek external assistance are likely culprits. A softer German IFO (business climate: 101.4 vs. 102.5 expected, Current assessment. 110.3 vs. 111.0, Expectations component 93.2 vs. 95.0) is contributing to keeping the USD better bid. However, we continue to believe that Fed monetary stimulus should ensure that the USD stays weak until the Fed stops buying bonds at the end of 2013 into 2014. More Fed speak this week should reaffirm the Fed’s commitment to their policy action and induce USD selling.
– The focus this week will be on Spain
This week focus will be on Spain which has a full agenda set. The Spanish government will present its 2013 budget, announce its planned structural reforms and publish the result of the bottom-up bank audit. These reforms and the budget will then be assessed at the Ecofin meeting on 8 October. Spain will only request help after it has implemented the reforms required by the Troika. Due to Spanish politics, Spain could ask for support before the elections on 21 October and after the Ecofin meeting on 8 October. Positive news on the budget and the projected reforms may provide a boost to the EUR, but overall headline risk is likely to come back into play.
– A weak Chinese PMI at the end of the week will likely weigh on AUD
The September Chinese HSBC PMI indicated, once again, that the Chinese economy has yet to turn around, remaining in concretionary territory. At the end of the week, the official PMI will be released. If the PMI remains below 50 for the second month in a row, the AUD will likely come susceptible to profit taking. The rates market is already pricing in some 85bp of cuts over the next 12 months, and we view that, due to the Fed’s aggressive policy stance, AUDUSD will continue to be supported on any dips. We continue to expect AUDUSD rallying up to 1.0800 by the end of the year, but for now favour long NZD to positioning for USD weakness.
– IMM community turns positive on GBP and extends CAD positions
The IMM speculative community turned positive on GBP after holding net short GBP positions for two straight weeks. We too remain positive on GBP and see further upside to GBP in the coming months. Meanwhile, net long CAD positions continue to rise, reaching a new all time high. While we see further upside for CAD on the back of Fed easing, positioning looks overextended which makes us want to stay on the sidelines for now. Also worth noting, net long JPY positions were nearly halved. Expectations of easing from the BoJ after the Fed announcement raised the stakes for the BoJ to respond by easing policy. Despite its efforts, USDJPY strength will likely be short lived. Net long NZD positions increased and the positive momentum on the New Zealand data front may add to long NZD positioning. We remain long NZDUSD, targeting 0.8470.
– Dovish BoJ minutes unlikely to prevent USDJPY decline
The BoJ minutes released this morning provided dovish comments to justify last week’s expansion of the asset purchase program. USDJPY’s rise last week above 79.00 proved to be short-lived, and we expect the cross to continue to drift lower below 78.00. We view that the BoJ will have a difficult time keeping USDJPY high with such aggressive Fed monetary policy in place. Unless the BoJ attempts to match the Fed’s aggressive policy, USDJPY will continue to grind lower from here. Policymakers, however, will continue to threaten intervention, but the impact on USDJPY will be short lived.
BNP Paribas