– EUR, AUD & NZD rebound but peripheral eurozone risks continue to steer the markets
Broad USD strength has reversed during the Asian time zone despite ongoing concerns over Spain. The EURUSD has bounced to 1.29 while the rise in Australian jobs vacancies (+ 4.2% in August) has pushed the AUDUSD back above 1.04. We remain short USDs and our favoured short USD trade (long NZDUSD targeting 0.8470) has also bounced to a high of 0.8275. Still, the market focus remains firmly on Spain following protests in Madrid (and also in Athens) coupled with the announcement that Spain will miss its public deficit target of 6.3% of GDP this year brought eurozone stress back to the fore. Spain will be the focal point of the markets today as Prime Minister Rajoy presents his economic reforms and the 2013 budget. Although the Spanish government is requesting more details from the ECB and the EU Commission on the conditionality of a potential programme, time is not on Spain’s side, with the EUR 20bn bond redemptions coming up at the end of October. We continue to expect the government to ask for support sometime next month, after the Eurogroup meeting on 8 October. Spain’s acceptance of a programme should help relieve markets as the ECB could start buying Spanish bonds, thereby reducing sovereign risk premia and boosting the EUR. We target 1.35 on EURUSD by yearend.
– Eurozone data to be a sideshow with the focus on Spain, although it would signal scope for an ECB cut
While Spain has become all consuming, developments out of Greece are likely to leave the EUR vulnerable to headline risk, as well. Reuters reported that tensions between Greece and members of the Troika have increased. The IMF is demanding European governments (creditor nations) to write off some of the Greek debt they hold. The report also suggests that the IMF wants an official sector restructuring. German CPI suggested that there is scope for the ECB to cut in December, and eurozone M3 and private-sector lending will only support that. M3 is forecast to tick higher for the month of August, but bank lending to the private sector should prove that the outlook for lending remains dismal. On the upside, the eurozone economic sentiment indicator should stabilise on aggregate, but the disparities between individual countries will persist. The data are likely to have a muted impact on the currency with the focus on Spain.
– US Durable goods to drop dramatically
US durable goods orders are expected to contract by 4.9% for the month of August, given that there was only one Boeing order for the month vs 260 in the prior month. Core capital goods shipments are also expected to decline by 1%. The pace of shipments is slowing for Q3, but it continues to contribute positively to growth. However, there are risks that this could change come Q4 and fall into negative territory. The data highlight that that the underlying growth in the US remains weak, which should offer credence to the Fed’s policy and sway open-ended QE sceptics in the Fed’s direction.
– USDJPY unlikely to push higher, despite dovish BoJ rhetoric
This recent bout of risk aversion has kept the JPY well bid, which has raised concerns among BoJ members. A board member on Wednesday noted that the BoJ will ease further if risks increase. He noted that buying more risky assets is an option for the BoJ and that both the BoJ and the MoF should work together in “their resolve of correcting an over-valued yen”. As we have highlighted, the scope for JPY weakness is limited, given the Fed’s aggressive policy stimulus. The BoJ will have to pursue a more aggressive policy than the Fed to weaken the JPY. However, we don’t think that this will be the case. As such, USDJPY is likely to grind lower, but USDJPY’s decline will be interrupted by bouts of verbal intervention.
BNP Paribas