– USD starts to give back recent gains – still an opportunity to buy GBPUSD and NZDUSD
The USD has started to give back some of its recent gains, particularly against the commodity currencies. We expect that amid little major newsflow this renewed sell-off in the USD can continue. AUDUSD has found support in the past 24hrs at 1.0150 – the same level that the crosses bounced of in early September to rally up toward 1.0600 – while NZDUSD has rebounded near to its 55day ma. Meanwhile, EURUSD and GBPUSD have so far failed to move substantially higher – we think that they could catch up with the commodity currencies today, especially if UK data surprises to the upside and positive headlines are delivered by the Eurogroup meeting (see below for more details). On the US front, there are no major releases from the US over the days ahead, suggesting that focus will be on Fed Yellen’s participation in a panel discussion at the IMF meeting’s in Tokyo at 0930 local time on Wednesday. The Beige Book on Wednesday will also provide insight into the Fed’s assessment of the recent US economic conditions following general upside surprises to the US data flow in September. FOMC members have clearly stated that easy policy will be maintained for some time. Our economists view, in particular, that the economic recover is unlikely to 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.
– UK data on Tuesday may provide a boost to GBPUSD
We view that GBPUSD grind down to 1.6050 provides an opportunity to enter long GBPUSD trades. Last week we added to our short USD recommendations with a long cable trade targeting a move to 1.6800. Much bad news has been priced into the GBP after three straight quarters of negative GDP growth in the UK. With so much bad news priced in, the GBP will be vulnerable to a sharp rise on positive data releases. BNPP economists expect an upside surprise to UK manufacturing data on Tuesday – BNPP expects a flat m/m reading, vs. mkt consensus of -0.6%. A flat reading would be very positive considering that in July manufacturing production rose 3.2% m/m. We expect such a positive surprise to provide support for GBPUSD. Our economists believe that UK GDP will rebound in Q3, with a rise of 0.7% q/q (to be released on 25 October), breaking the trend of multiple quarters of negative growth. Also of interest on Tuesday evening will be BoE Governor King’s speech at the LSE on monetary policy responses to financial crisis.
– 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 which started at 1700 on Monday and run through 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 due 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 agenda point at this week’s meetings. 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.
BNP Paribas