– 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.
– JPY can weaken ahead of Oct 30 BoJ; But month-end snap back appears likely
The BOJ revised downward its assessment in 8 of 9 regions in its equivalent of the Beige Book report. This is the largest downward revision since January 2009. Furthermore, adjusted trade balance was weaker in September as exports fell 1.3% y/y and imports rose 4.1% y/y, with weakness emphasised in China-bound shipments. This data will increase pressure on the BOJ to ease policy at next week’s meeting (Oct 30) and such expectations could keep JPY-crosses under upward pressure near term. However, such easing has previously produced little impact on the JPY. We remain bearish on USDJPY especially given our view on QE3 (much bigger than consensus). EURJPY may grind higher with general EUR positive sentiment. Still, we only target 104 by yearend.
– Stronger AUD tone will be dependent on China; Watch Wednesday’s China PMI
AUDUSD 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; BoC may not provide a negative catalyst
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 Tuesday’s BoC statement. Our economist expects the BoC to maintain its modest tightening bias, thus not providing the catalyst for the CAD to sell-off this week.
BNP Paribas