– RBA revises growth forecasts moderately lower but little impact in AUDUSD
The RBA cut its growth forecast for 2013, warning that the mining boom will peak earlier and at a lower level than expected as weaker commodity prices curb investment plans. The RBA expects growth of just under 2.75% for the year ending 2013 down from 3% previously. Growth for 2014 is expected at close to 3% – unchanged from August. It expects underlying inflation to remain within its 2-3% target range. Our Australian economists believe that base rates in Australia are forecast to fall to 3.0% by early next year, however, we warn that it is dangerous to short AUDUSD in an environment where the Fed is likely to be significantly expanding its balance sheet. Domestic weakness is more likely to be exhibited through the fixed income market or AUD crosses. There is the possibility that AUDCAD and AUDNZD fall further.
– More USDJPY weakness ahead
The Japanese yen rose notably over the past several hours. Strong demand for 30-year US Treasury debt at yesterday’s auction was seen as the catalyst for the latest dip in USDJPY, along with some ongoing softness in the US equity indices. The latest market moves bode well for our non-consensus USDJPY short trade, initially entered at 79.65 and targeting 77.00. While markets have been focusing on the recent BoJ easing, our view has been that JPY weakness will prove to be short-lived, as was the case in February of this year. Specifically, under the ongoing Fed QE3 scenario, low US rates should stand in the way of any meaningful and sustained USDJPY upside. Our measure of market positioning also shows JPY shorts reaching clearly overextended levels this week, reinforcing the view that further downside is likely for the Japanese currency. Our current favoured USDJPY indicator – the 2 year US-Japan yield spread – has also turned lower and is now signalling further downside.
– Positive momentum from Chinese data, consistent with a GDP recovery in 2013
A slew of China data came out on the positive side this morning with industrial production, fixed asset investment and retail sales all slightly beating expectations. Furthermore, CPI eased to a 33-month low of 1.7% y/y and PPI deflation improved to -2.8% y/y. Our Chinese economists in Beijing believe both CPI and PPI have bottomed. But through the year end, CPI would stay mild and PPI continue to be negative. Today’s data supports the case for an economic rebound in Q4.and also our call for a recovery to 8% GDP growth in 2013. Nevertheless, we still expect authorities to maintain the accommodative policy stance to protect the green shoots by ensuring adequate market liquidity and enhancing transmission of monetary policy. Clearly, this data has supported risk in Asia with Asian currencies, AUD and NZD benefiting.
BNP Paribas