– 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. 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. 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 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 recovery 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.
– 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 euro zone 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 Euro group so. EURUSD is therefore unlikely to gain substantially on the back of this week’s events. Short-term investors are likely to continue to trade the ranges.
– Recent GBPUSD dip to be short-lived; Taxes on Swiss deposits unlikely to impact CHF
This morning’s manufacturing production release came in weaker than expected (-1.1% m/m vs. -0.7% m/m), but should be kept in context of the prior month’s abnormally strong reading (+3.1% m/m). Looking ahead, our economists believe that UK Q3 GDP (due October 25) will rebound (+0.7% q/q), breaking the trend of multiple quarters of negative growth. This should highlight the relative economic out performance of the UK vis-à-vis the euro area, and hence we continue to think that a long GBPUSD position may be better than a long EURUSD position (See Pulling the Trigger on Long GBPUSD, FX Weekly, 04 October). Last week we added to our short USD recommendations with a long cable trade targeting a move to 1.6800. Meanwhile, reports that custodial banks have begun charging depositors to hold Danish Kroner and Swiss Franc has created some excitement this morning. This is not new with other banks having put similar charges in place earlier. Such soft capital controls did little to affect FX rates in the past, with the Swiss experience of the 1970’s a case in point. However, we continue to feel the ongoing easing in euro area stress will continue to see the EURCHF fair value trade naturally higher, and continue to hold a long EURCHF recommendation from 1.2060 (established Sep 6) targeting 1.2500 multi-month.
BNP Paribas