– Peripheral euro zone risks will hold back EURUSD today; We favour short USD exposure
The bout of broad-based USD strength amid risk-aversion seen yesterday has reversed a little given renewed stimulus hopes in China this morning. But we continue to expect that the biggest factor for near term risk-sentiment continues to remain Spain following recent events (protests, Spain regional elections, news Spain to miss 6.3% GDP deficit target this year). Uncertaintly on the timing for Spain PM Rajoy’s request for formal assistance can continue to hold back a stronger risk-seeking tone, the proof seen in this mornings quick reversal of the EURUSD rally up to 1.2900 in the Asian time zone. The focal point today will be on the announcement of the 2013 budget; the Bloomberg calendar suggests a press conference begins at 13:00 BST, but our economists suspect that an announcement could come closer towards 16:00 BST. 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 maintain our long held 1.3500 year-end EURUSD target and remain short USDs; our favoured short USD trade (long NZDUSD targeting 0.8470) has also bounced to a high of 0.8290 today. We maintain our conditional GBPUSD long looking to enter on a dip to 1.6000; today’s business investment component of Q2 GDP surprised positively.
– Eurozone data signal Dec rate cut; But Spain/Greece developments the current EUR catalyst
Softer German CPI yesterday and this morning’s weaker release of euro zone money supply data suggests that there is scope for the ECB to cut in December. However softer data (and rate cut expectations) are un likely to affect EUR at present with credit risk (peripheral spreads) more important as a driver. But it does play to the our economists view we will eventually get a rate cut (December, and not next week), so EUR’s yield advantage could continue to decline down the line. This could become a stronger driver towards the end of the year, but for now the focus is on Spain and Greece. While Spain has become all consuming, developments out of Greece leave the EUR vulnerable to headline risk. 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.
– US Durable goods to drop dramatically
US durable goods orders are expected to contract for August given only one Boeing order for the month vs. 260 in the prior month. 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