– Rebounding China sentiment to provide tailwind to AUD
While more mediocre US earnings releases overnight have not provided a positive catalyst in themselves, the stronger batch of activity data out of China this morning should help maintain positive sentiment. All releases came in stronger, with the higher frequency FAI, retail sales and industrial production all above consensus estimates. Following the sharp 1 figure plus rally yesterday, AUDUSD is consolidating just under its 55-day moving average (now 1.0391). However, as we pointed out earlier this week, China related sentiment was improving with the Hang Seng China Enterprises Index having already broken out to a 5-month high. That gauge this morning has broken higher still, and this should provide a strong positive catalyst for AUDUSD, counteracting still present RBA easing expectations. We therefore remain bullish on commodity currencies, including AUDUSD and NZDUSD (our favoured commodity currency) towards the end of the year. Beyond the latest round of economic data, our economists expect growth to be recovering slightly in Q4 and to accelerate in Q1 following new leadership in China. Meanwhile, EURUSD closed above the 1.3100 overnight and continues to remain supported, though with the upcoming EU Summit (starting today), we wouldn’t be surprised to see EURUSD consolidation here. SEK is in focus this morning with knee-jerk strengthening seen overnight following a speech from Riksbank Governor Ingves defending criticism for not lower rates further.
– We favour long GBPUSD ahead of next week’s UK GDP release
Folowing Wednesday’s release of MPC mintutes, 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. Our economists and the market expect a reasonable rebound in Thursday’s retail sales release, looking for a 0.4% m/m rise. In FX, we continue our positive GBP stance and have an existing trade recommendation from 1.6140 targeting 1.6800 multi-month.
– Political pressure on BoJ intensify, September’s disappointment for short JPY may be repeated
The one month high of 79.05 in USDJPY reached on Wednesday was triggered by a Nikkei article suggesting that the BoJ may come under more pressure to ease policy at the end of October. This follows from reports earlier in the week that PM Noda may instruct his cabinet to craft new measures by November-end. Our economists believe political pressure on the BoJ to ease will increase in the weeks ahead 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). However, if the BoJ deliver only another JPY5-10tr this may disappoint the market as back in mid-September when USDJPY rallied to 79.20. The next key events will be Oct 22 BoJ minutes and Governor Shirakawa’s speech (both Oct 22).
– 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).
BNP Paribas