– Geopolitical tensions not yet systemically hurting markets; We stay USD bearish
Markets are holding in well in holiday-thinned trading with Japan bourses outperforming following the rally up in USDJPY to a two week high. EURUSD and GBPUSD remain better bid above 1.2900 and 1. 6070 (both above yesterday’s lows) ahead of the ECB and BoE meetings today. AUD fell to fresh 4 week lows following slightly softer retail sales report, but the AUD selling momentum appears to be waning (more below). More broadly, risk sentiment continues to hold up despite simmering geopolitical tensions in Turkey-Syria and also Iran. However, this is not having a “systemic” impact on the market so far; if anything oil prices are some 4% lower and equities are holding in. Stronger US data- be it the ADP employment report, ISM non-manufacturing index and the US ISM earlier this weak has not hurt risk-appetite. As mentioned earlier this week, the promise of open ended QE (Bernanke once again defending it this week) has seen a positive correlation between “risk-on” and US data. The reaction suggests markets beginning to believe that policy easing will take place no matter what, playing to our bearish view. We reiterate our conditional long GBPUSD on a dip to 1.6000 and retain our long NZDUSD recommendation.
– ECB press conference likely to do little to encourage expectations of a cut
Meanwhile, the focus today shifts to the ECB meeting. Our economists believe that the ECB press conference will do little to encourage expectations of lower policy rates and suspect that the ECB may be becoming complacent as it did after the initial positive effects post the high from the 3yr LTRO. The improvement in market conditions following the unveiling of the OMT framework has reduced the urgency to consider additional measures. However, as noted by our economists, if Mr. Draghi has learned anything from past mistakes, he may want to leave policy options open at the press conference. With very little expected for this ECB meeting, the real market mover for the EUR may be the Spanish bond auctions. Today’s Spanish bond auctions (2Y, 3Y, 5Y all at 09:30 BST) will provide a litmus test for the market’s perception on Spain. We could closely watch the performance of crosses like EURGBP and EURJPY, which have both gained in recent days.
– BoE to keep policy unchanged today
The weak PMIs from the UK have not changed our positive outlook on the GBP. Our longer-term positive GBPUSD call is not based on UK data, and we believe that the USD weakness will play a major part as the FX driver shifts from the EUR to the USD. The BoE will likely leave policy unchanged at today’s meeting, although we expect another GBP 50bn in QE in November, and again in February. But, we will have to wait for the BoE minutes on 17 October to get further insight into BoE policy. We continue to like GBPUSD higher, targeting 1.7300 by year-end. GBPUSD correlated more with EURUSD as the USD move dominates, leaving EURGBP within broad ranges.
– Independent AUD weakness continues but now oversold
AUD crosses continued their fall in the early Asian session, however the selling momentum is tapering off. The past few days decline following the RBA cut and dovish statement was driven by the market pricing in more rate cuts. However, as of today market pricing for RBA rate cuts is unchanged; -20bp of 25bps still for November 7 and with pricing for April unchanged. At the same time, equities (SPX) are holding in well, though commodities (CRB index, esp. soft commodities) are softer. While we believe AUD could remain under pressure on the crosses (AUDNZD and EURAUD) on a multi-week view, on a multi-day view, the AUD is looking extremely oversold in our opinion. Our STEER model indicates that AUDUSD appears oversold even accounting for the RBA’s rate cut on Tuesday. This may imply that the downside for AUDUSD may be limited from here.
BNP Paribas