– EURUSD enters a more bullish phase; Data unlikely to raise ECB easing expectations
The EURUSD crept up again on Monday after Spain’s prime minister won an election victory yesterday in his home region of Galicia. This victory likely removes a hurdle for Madrid to apply for EU/ECB intervention via OMTs. This week the focus shifts more to economic data as opposed to political events. Wednesday’s European PMIs and German IFO are expected to come in slightly stronger, and hence are unlikely to prompt speculation of a rate cut at the November 8 ECB meeting. From a risk sentiment perspective, we are not concerned with the modest move lower in banking shares at the end of last week and do not believe this will provide the catalyst for a risk- negative move in FX. For the EUR especially, we believe that support could be more durable and derive from the improving capital flows picture, which more powerful that the shortsqueeze that dominated over August and September. Friday’s release of August eurozone balance of payments data showed debt related inflows improving.
– Stronger AUD tone will be dependent on China; Watch Wednesday’s China PMI
AUSUSD softened marginally following a budget update from the government, which is still aiming for a surplus this fiscal year, albeit smaller than previously announced. This trend should keep intact the view a tighter government surplus will give the RBA room to cut rates. AUDUSD is trading around $1.0320, down from Friday but little changed on the back of the budget. Wednesday will be important with the release of China HSBC PMI and Australia Q3 CPI. We would place more importance on the PMI and the expectations it sets for the official NBS reading (early November). Australia inflation should show the RBA’s preferred weighted median measure rebounding to 2.2% (from 1.9%) but this is still at the bottom end of the CB’s 2-3% inflation target range. AUDNZD will be a key focus this week. While AUDNZD could continue to grind higher towards 1.2700, the RBNZ statement (Wednesday night) could provide a catalyst for a move lower once again with the statement potentially deflating the near 30bps in easing that NZD 12m OIS is pricing.
– Negative M&A news unlikely to hurt CAD; Not so dovish BoC could help CAD
The weekend decision by the Canadian Government to block the takeover of a Canadian energy company by a Malaysian state-owned company is unlikely to hurt the CAD in itself. While the deal itself is not huge (USD 5.23bn), it is considered by investors as a litmus test for the larger USD 15bn bid by China for another Canada’s energy provider. We find no sign of independent CAD weakness following a failure of such deals, Indeed, the November 3, 2010 decision by Canada to block an even larger USD 38bn bid did not result in independent CAD weakness. Chart 1 demonstrates that over that week, the CAD and AUD NEER rose following a broader risk-on environment. More important for CAD will be broader risk-sentiment and Tuesday’s BoC statement. While risk-sentiment will be hostage to the US earnings season, we do not think the BoC this week will provide a lasting catalyst for a CAD sell-off. Our economist expects the BoC to maintain its modest tightening bias in the Tuesday’s accompanying statement, and believe last week’s speech by the BoC Governor was not as dovish as the media interpreted it. This should provide a catalyst for a CAD recovery, we think.
– SEK strength to be short-lived; Thursday’s Riksbank statement important
The relatively hawkish sounding opinion piece from Riksbank Governor Ingves last week has been the driver of the SEK’s out performance with the market paring back expectations for rate cut at this week’s meeting. Our economists never were always forecasting a no change at this week’s meeting, but continue to believe the rationale for a December rate cut remains intact, especially should local economic data remain weak. Softer manufacturing confidence data (Wednesday) followed by a still dovish Riksbank statement (Thursday) should see SEK come back under selling pressure. We remain long the NOKSEK RV trade targeting 1.1940.
BNP Paribas