– Australian retail sales data give go ahead to RBA rate cut
Our economists note that broad-based weakness in Q3 led real retail sales to fall by 0.1% q/q, the worst performance for almost two years. However, the monthly numbers suggest some positive carryover for Q4, which implies Q3 is likely to be the low point for consumer spending. Nonetheless, combined with today’s trade data showing capital goods imports down 16% in three months the current weakness in domestic demand is likely to prompt a further 25bp RBA rate cut at this week’s meeting. Despite the weak data and the market consensus for further RBA easing, AUDUSD has rallied this morning from Friday’s close, hitting a high of 1.0369. AUDUSD is currently trading very close to the converged 21, 55 and 200 day moving averages, so price action is critical. Given our expectations for a weak USD and strong Asian currency performance, we do not believe that FX is the best way to reflect Australian domestic economic performance. Indeed, we target an ongoing recovery to 1.08 by yearend. Still, AUD remains weak on the crosses and AUDNZD and AUDCAD are at risk of falling further.
– We anticipate controlled USD weakness this week
In the week ahead, a number of event risks such as the US election (Tuesday), Chinese leadership handover and the ECB meeting (both Thursday) will likely slow the pace of moves in the FX markets. Accordingly, while the USD should continue to weaken against the commodity currencies and GBP, it will be a grind rather than a sharp decline. AUD will be a likely beneficiary of positive noises coming ahead of 18th Chinese leadership change (Thursday). The uncertainty continues as to when Spain requests formal assistance and if this coincides with requests by Greece, Cyprus and Slovenia at Eurogroup (November 12) meeting. Our CDS measure has continued to flag a neutral to positive outlook for EUR crosses (chart), but our FX positioning analysis suggests short EUR positions are beginning to increase, though from neutral levels. We believe that the EUR has been holding on well on improving capital flows outlook, but this has been driven by the ECB promise to backstop the bond markets via the OMT. Hence we would require that Draghi simply reiterate this message at this week’s press conference to keep EURUSD supported.
– FX reaction to US data still mixed so far, unlike other asset classes
Since the Fed announced its decision to buy MBS as part of its QE3 back in mid-September, the USD has not reacted clearly to US data. October was a month of stronger US data (e.g. ISM on Oct 1, NFP on Oct 5 and retail sales on Oct 15). But over the month, USD was softer vs. AUD and KRW, stronger vs. JPY and flat vs. EUR. In contrast, the reaction has appeared more logical for both gold and US treasury prices both weaker following stronger data. The gold uptrend reversed on the day of the stronger October 5 NFP report, while US 5Y yields have moved some 15-20bps higher on the month. We suspect that earnings season and political events (collectively until mid-November) could be holding investors back somewhat. A stronger realisation that US treasury purchases are forthcoming next year should see trend USD weakness.
– IMM investors cut USD shorts further and increase EUR and JPY shorts
IMM data (CFTC) reports that currency speculators cut exposure against the USD in the latest week to the lowest since the week of September 4. The value of the USD’s net short position plunged to $708. million in the week ended October 30 from a net short position of $4.0 billion the week of Oct. 23. Speculators last were long in the week ended September 4. In other currencies, non-commercial investors significantly increased net short JPY and EUR exposure while adding to longs in AUD and GBP. Investors reduced CAD longs. Our own BNP Paribas Positioning indicator provides a far broader measure of FX positioning but also signals that short JPY is the largest market position currently in FX.
BNP Paribas