– Spanish budget well received – risk rally rolls on
The long-awaited Spanish budget has been well received by markets with Spanish sovereign spreads relative to Germany narrowing and global equties finishing higher. While the USD has generally weakened during the Asian session, high beta and commodity currencies were the biggest winners on the day against the USD with our favoured currency NZDUSD taking out the recent high at 0.8354. After much anticipation over the Spanish budget, the announcement came in line with expectations, but the details were rather skimpy. The outline to the structural reforms was delivered, but the details have yet to be announced. No time line has been provided for this, but must be announced before 8 October to be reviewed by Ecofin. Also worth noting, investors who were concerned that Spain may not ask for external support will not take comfort in the transfer of EUR 3bn from the social security fund to cover liquidity needs. The budget represents two steps forward and one step back, which is why the EUR only moved slightly higher. The EUR should find support from key political events in the month of October, including the Ecofin meeting, EU Summit, Spanish regional elections and the eventual request for support. Ahead of that, comments from ECB members Asmussen and Godeffroy today will be important. We maintain our long held 1.3500 year-end EURUSD target. Also, the focus remains on Spain, with the release of the bottom-up banking sector review due out later today.
– US data reinforces Fed’s aggressive easing stance
US data on Thursday significantly disappointed and bolsters the Fed’s decision to pursue aggressive policy stimulus. Total durable goods collapsed 13.2%m/m in August. Also, Q2 GDP was unexpectedly revised down to 1.3% q/q saar from 1.7% in the third estimate. The weakness was broad-based. The biggest contribution to the downward revision came from private inventories. Growth fell further below trend in H1 and is consistent with the current weakness in the labour market. Our economists expect growth to remain well below trend through the second half of 2012 and pick up in 2013, as the Fed’s policy easing takes effect. Today’s US personal spending and income for the month of August is forecast to come in weaker than the previous month as is the University of Michigan consumer Sentiment for September. Thus, we remain bearish on the USD; our favoured short USD trade is long NZDUSD. We maintain our conditional GBPUSD long, looking to enter on a dip to 1.6000.
– Sweden and Norway retail sales and the Swiss KoF leading indicator are on the calendar today
The release of both the Swedish and Norwegian retail sales today may give the NOK an advantage over the SEK. We expect a significant rebound in Norwegian retail sales for the month of August vs the previous month. We continue to favour NOKSEK higher on a longer-term basis as the Norwegian economy is likely to outperform the Swedish economy. Also in Europe, the KOF leading indicator for September should reaffirm the SNB’s resolve in weakening the CHF vs EUR as it is expected to decline. We maintain a long EURCHF position on the back of the view that eurozone risks should abate in the coming weeks.
– Chinese data will be key for the AUD
Chinese data over the weekend will be crucial for sentiment. The release of the PMIs for September may augment the weakness of the Chinese economy in Q3. Expectations for China to deliver more stimulus is rising and will only increase if the PMIs remain below 50, yet again. The AUD will fall victim to any bad news on China and will likely raise expectations that the RBA will take on a very dovish tone next week. The markets are already fully pricing in a cut from the RBA at the 2 October meeting, but we expect RBA to stand pat and keep the door open for a cut.
BNP Paribas