– EURUSD consolidation due; EU Summit unlikely to be negative catalyst
The tones out of the two-day EU Summit, which started on Thursday, have so far been modestly positive. It has been agreed that a legal framework for common banking union will be formed, though the implementation for the same will come later (2013) than originally planned (See Economic Desknote Europe – EU summit: EU leaders give a nod to the market, published earlier today). There was some initial modest negative bias in banking shares this morning, but this should be put in context. Following a straight rally for six consecutive sessions on rising volumes, a little give back towards the weekend should not surprise. Accordingly, we do not think eurozone issues will hinder broader risk-sentiment. The driver should continue to remain the US earnings season and here the less favourable turn in reports (particularly the tech sector) could keep risk-sentiment in check. For FX, expect some consolidation in USD-crosses and for EURUSD in particular, given the European event calendar picking up (the current EU summit, Spain’s regional elections next week and Spanish bond redemptions). Market concerns around Spain or Greece will be addressed at the 12 November Euro group meeting.
– EUR bias remains positive; Eurozone BoP continued to improve in August
However, our view is that the current EUR bid is related to an improving flow of funds picture, which more powerful than simply the short-squeeze in bearish EUR positions that dominated for much of August and September (See the Global FX Plus, 11 October for more). In this regard, this morning’s release of eurozone balance of payments data (BoP) for August continued to improve for the third straight month, driven especially by debt related inflows picking up, with capital outflows also moderating (See Eurozone BoP remains euro supportive from Market Economics, published earlier today).
– Canadian CPI today could move CAD Positioning now a little less extended
Canadian CPI is scheduled to be the main data release on Friday. Both BNPP economists and the market expect headline GDP to rise slightly to 1.3% while core CPI is expected to decline to 1.4% from 1.6%. We view that positioning in CAD is important for future price action. Following dovish commentary from BoC Governor Carney at the beginning of the week our FX positioning analysis suggests that investors have lightened up their short USDCAD positions (See pages 11,12 of latest FX Weekly). With Carney following up by stating that his comments have been taken out of context, this provides scope for investors to re-establish short USDCAD positions over the weeks ahead. The BoC statement and retail sales next Tuesday will also be a focus for investors who are looking to re-enter short USDCAD positions.
– GBP dip to prove short-lived
Meanwhile, GBPUSD’s sharp decline yesterday has not been related to any significant news flow, though it is clear that the resilience of EURGBP has been surprising with spot now a third session above the 200-day moving average (currently 0.8111). We did have reports from BoE “inflation dove” Miles published this morning making a case to provide a fresh boost to demand, and warning of a period of sub par growth and weak inflationary pressure. Still, a projected rebound in Q3 GDP will probably be more in focus and support GBP, in our view. We therefore view this dip as an opportunity to enter long GBP positions given our view for substantial GBPUSD appreciation over the months ahead.
– SEK strength to be short-lived, we recommend long NOKSEK
We view the recent strength of the SEK as an opportunity to enter long NOKSEK positions. The relatively hawkish sounding opinion piece from Riksbank Governor Ingves has been the driver of the SEK’s out performance with the market paring back expectations for rate cut next week. Still, our economists’ view on a December cut should remain if the local economic data remains weak. We continue to hold our long NOKSEK RV trade targeting 1.1940.
BNP Paribas