– Teflon-coated AUD attempting to break higher
Australian building approvals surprised to the upside for September rising by 7.8% mm (expected 1.0% mm) from an upwardly-revised 8.8% mm in August. Private-sector credit growth also increased by 0.3% mm – slightly better than consensus. AUD and NZD have been the best FX performers over the past week and we generally continue to expect the commodity bloc (AUD, NZD and CAD) to outperform strongly (see chart). Our BNP Paribas STEER™ model suggests that USDCAD is now beginning to look rather overbought relative to its drivers and vulnerable to a move lower to its fair-value at 0.9940. Also, rhetoric from these central banks suggests that intervention to prevent appreciation is unlikely. RBA Deputy Governor Lowe noted that the AUD was still not “extremely” overvalued (which consistent with conclusion from the BNP Paribas FEER model), and that the threshold for intervention was quite high. This attitude of allowing the currency to freely float is in stark contrast to countries in Asia where there is increasing vigilance over the pace of currency appreciation. The HKMA’s fifth USD buying intervention in a fortnight and reports suggesting S. Korea’s central bank and regulator will monitor FX forward positions on banks’ books play to this view. Ultimately, should several EM countries intervene against inflows to slow the pace of FX appreciation, and then the freely floating high yield currencies (AUD, NZD, and CAD) could receive an additional layer of support. This was very much the case in H2 2010 following QE2. We have discussed potential options market opportunities arising from the trend in the BNP Paribas FX Volatility Focus of our FX Weekly.
– FX still hostage to earnings season in thinned trading conditions
Risk sentiment flipped to positive from negative last week following better-than-expected earnings reports from the eurozone. As mentioned in recent weeks, the earnings season could continue to impart volatility in risk-sentiment. For the eurostoxx 600, only 174 of 371 members have reported earnings so far. Hence, there is plenty of potential for earnings season to sway risk-sentiment and impact the USD until mid-November. While it remains uncertain when North American markets return to normalcy, assuming this occurs today, and then fundamental drivers could once again drive currencies. The key markets point to highlight is today’s Norges Bank statement and Thursday’s UK PMI ahead of Friday’s US employment report. Our bias would be for the GBPUSD to recover, but point out some downside risks to NOK coming from today’s Norges Bank statement (more below). A weaker US employment report on Friday would put USDJPY particularly at risk of a sharper decline, especially if the jobless rate backs up above the 8% level.
– NOK at risk today from dovish Norges Bank statement; NOKSEK dips present opportunities
The main event today should be the Norges Bank meeting (1300 BST). While the central bank is expected to keep rates unchanged at 1.50%, the singular focus will be on the tone of the statement. The last meeting was on August 29 and since then, the data, on balance, have come in on the softer side. The last two PMI releases (August and September) have in weaker than expected, and below the 50 level. At the same time, inflation has been softer with underlying CPI at 1.2% (Q3 average), below the 1.4% Norges Bank June projection. Accordingly, we are likely to get a downward revision to the Norges Bank’s inflation forecast today. This could hurt NOK, with long NOK positioning according to our positioning analysis looking a little stretched. However, we would fade any knee-jerk NOK weakness; ultimately Norges Bank (along with BoC) remains the only central banks likely to tighten rates next year. Moreover, BNP Paribas STEER continues to suggest that the cross remains undervalued, with an implied fair value of 1.1810. In particular, the divergence between Norway and Sweden rates continues to provide a positive signal. This driver could become more influential should Thursday’s Swedish PMI come in on the softer side. We retain our long NOKSEK RV trade (established Oct 17) from 1.1675 targeting 1.1940 with 1.1535 stop.
BNP Paribas