– EURUSD still constructive, but could consolidate towards the weekend
Risk-sentiment has continued to move higher helped by better still decent US earnings reports and a decision by Moody’s to affirm Spain’s investment grade rating (the lowest at Baa3 with a negative outlook) last night. EURUSD has rallied 1.5 figures over the past two sessions and now above the 1.3100 level, also tested earlier in the Asian session. We recall last week (Wednesday Oct 10) how after an initial set back, EURUSD rallied a day following S&P’s downgrade of Spain (two notches to BBB-with negative outlook). The EUR has continued to rally on negative as well as positive news catalysts, which suggests that underlying positive sentiment must be strengthening, something our analysis of the flow of funds picture has indicated to us (See last week’s FX Weekly: More evidence of shifting EUR sentiment). Given the upcoming EU Summit (starting tomorrow), we wouldn’t be surprised to see EURUSD consolidation here, but what is pleasantly surprising is how our up-to-date eurozone CDS-indicator – which we have used flagged persistently in recent weeks- continues to flag bullish EUR signals even at current levels. Our economists now view that a Spain aid request could be more likely between late October to mid-November, with the 12 November Eurogroup meeting an important date to watch.
– GBP boosted by more hawkish BoE minutes as anticipated
GBP rallied and implied money market rates across the short-sterling futures curve rose today following a set of BoE which dod not provide the smoking gun for additional QE in November. As we flagged in our European morning daily, the likelihood of a more divided MPC board was likely with a number of members, like Martin Weale, chief economist Dale and Broadbent have suggested that they remain more opposed to QE near term. Our UK economist still thinks the bias is for more QE in November with the majority of internal BoE members still of the view that more is required (not less) after the projected GBP 375bn target is expected to be hit at the end of October. However, he points out that the November meeting is likely to be a fractious affair, but believes it is unlikely to be unanimous. Accordingly, the onus will be on the UK Q3 GDP report next week which our economists expect to rebound, albeit potentially falling short of BoE assumptions. On FX, we continue our positive GBP stance and have an existing trade recommendation from 1.6140 targeting 1.6800 multi-month.
– Long NOKSEK RV Trade triggered
BNP Paribas STEER™ fair-value model earlier today triggered a long NOKSEK recommendation at 1.1675 earlier today, targeting a move to an implied fair-value of 1.1940, with a stop at 1.1535 The model indicates that EURSEK is looking markedly oversold, and outside the +/- 1.5 z-score corridor, while EURNOK, though slightly below the positive bound of the corridor, looks expensive relative to its fair value. (See FX Strategy Flash: RV Trade Long NOKSEK – 17 October). Our own discretionary bias has remained consistently bullish NOKSEK since early August (See Reiterating Long NOKSEK: Opportunity Knocks Twice, FX Weekly, 13 September).
– Political pressure on BoJ easing to intensify
Reports suggest that PM Noda may instruct his cabinet to craft new measures to curb deflation, JPY appreciation and expand quake reconstruction work by November-end. Today, a Bloomberg report tips that the BoJ will likely forecast a miss on its 1% inflation goal at its October 30 meeting. Our economists believe political pressure on the BoJ to ease will increase in the weeks ahead (See Japan: Political heat for monetary easing to intensify, Macro Matters, 4 October) with PM Noda handicapped on fiscal easing. We see the threat of intervention as remaining low given current market conditions (See JPY: Low threat of intervention, FX Weekly), but speculation of monetary policy easing could increase heading towards the October 30 CB meet, a few days before the G20 meeting (Nov 4/5). The October 22 BoJ minutes and Governor Shirakawa’s speech (both Oct 22) will be the next events in focus.
BNP Paribas