– Post-NFP USD rebound an opportunity to buy GBPUSD and NZDUSD
The USD’s initial sell-off in response to Friday’s NFP proved to be short lived, with the USD strengthening through to the end of Friday, particularly against the commodity currencies. We view that Friday’s stronger-than-expected NFP data should not provide a reason for investors to buy the USD. Meanwhile, the drop in the unemployment rate does not provide an accurate insight into the developments in the US economy. Going forward, we would expect a continuation of the relationship of stronger US data releases resulting in risk-on positioning and USD weakness. This has been clear that ease policy will be maintained until there is a sustainable improvement in the labour market. The FOMC’s long-term forecasts suggest that this would require the unemployment rate on a path to reaching 6%. With the centre of gravity of the FOMC having become far more dovish, this suggest that increasingly committee members view the lack of employment growth a cyclical problem, rather than entirely a structural problem. Our economists view, in particular, that jobs growth will not have picked up substantially enough by December when Operation Twist expires. This means that the Fed is likely to start outright Treasury purchases by the end of the year which we expect to further weaken the USD. We recommend short USD exposure with long GBPUSD targeting 1.6800 and long NZDUSD targeting 0.8470. We view that the recent strength in the USD provides an opportunity for entering these trades at the current time. On GBPUSD, our economists expect an upside surprise to UK manufacturing data which should provide the cross with support this week. Meanwhile, the US data calendar is light for the week, with the main release of interest the Beige Book. This will provide the Fed’s assessment of the recent US economic conditions.
– Eurozone Finance Ministers meeting to be in the right direction, but not a major catalyst for a EUR move
With ECB’s Draghi clearly stating last week that the ball is in the eurozone governments court, this week’s main event is the Eurogroup/EuroFin Meetings on Monday and Tuesday. The key focus will be on Spain and Greece and while we expect positive progress to be made on both accounts, we do not expect that the event will provide headlines that deliver a major catalyst for the market. Our economists do not expect Spain to be requesting financial aid at this week’s meetings, as had been suggested in various press reports last week. Rather, PM Rajoy is likely to wait until after regional elections on 21 October. This would provide a narrow window of around one week for Spain to seek assistance, given that bond redemptions are sure on 29 and 31 October. Meanwhile, on Greece no major action can be made on the decision to allow more time for the country to meet its goals until the Troika has completed its review. This is unlikely to be done ahead of this the Eurogroup so, again, catalysts for FX markets can not be expected from this week’s meeting. EURUSD is therefore unlikely to gain move substantially on the back of this week’s events and short-term investors are likely to continue to trade the ranges.
– Swiss CPI main data release amid holiday’s in Japan, US and Canada
Monday is currently a public holiday for Japan, with the main data release in Asia having been a move higher in China PMI Services to 54.3 – its highest level since May. Today is also a holiday for US and Canada, while in Europe the main data release for FX markets will be the Swiss CPI. BNPP economists expect the annual pace of inflation to remain at -0.5%. The SNB foreign exchange reserves data on Friday indicated that reserves grew by only CHF9bn in September, compared to a pace of around CHF60bn per month in June and July. This coincided with our EZ peripheral spread analysis that suggests pressure has eased off the 1.20 EURCHF floor substantially. We view that further easing of eurozone stress, plus a continuation of soft inflation and output data from Switzerland, should continue to push EURCHF higher. We recommend long positions targeting a move to 1.25 by year-end.
BNP Paribas