– GBPUSD weakness unlikely to be sustained beyond US data and FOMC minutes
Wednesday’s European session has been dominated by UK data flow with a more dovish that expected UK Inflation Report and slightly soft employment data. The BoE’s forecasts in the Inflation Report have not been significantly revised from the report in August – the outlook for inflation in 2-years has been revised higher to 1.8% from 1.7% while growth has been revised slightly lower to 1.9% from 2%. However, GBP is underperforming due to dovish comments from Governor King warning that the “bleak” prospects for the eurozone will slow the required adjustment of the UK economy and a rebound in growth. Nevertheless, we view that the sell-off in the GBP is unlikely to be sustained – on a relative basis the UK, and the outlook for BoE policy action, continues to appear favourable and should be supportive for Sterling. Our long GBPUSD recommendation is currently trading close to its stop of 1.5851 (200 day-ma) as the market has focused on the King’s comments this morning. Going forward, we view that a move higher in GBPUSD can be driven by USD weakness as soon as later today. BNPP economist’s expect a soft US advanced retails sales print of -0.3% m/m while the FOMC Minutes are likely to hint at the Fed’s willingness to buy US Treasuries once Operation Twist ends next month.
– Japanese politics pushes USDJPY higher…..an opportunity to sell
Japanese news agency Kyodo reports that Prime Minister Yoshihiko Noda has stated that he wants to call an election for parliament’s lower house on December 16. Noda told Democratic Party Secretary-General Azuma Koshiishi of his intention but the ruling party’s deputy resisted. Noda, under opposition pressure to call an election he promised in August would be “soon”, looks to be leaning towards holding one as early as next month after pledging support for a controversial U.S.-led free trade pact. Support for the government is at its lowest since Noda took office in 2011. USDJPY has rallied in response hitting a high of 79.80 in Asia. We remain short USDJPY targeting 77.00 and would reiterate that this rally represents yet again a chance to establish short exposure. Our favoured US-Japan 2-year yield spread chart continues to signal greater downside risk suggesting that a level around in the high 78s is justified (see chart). Additionally, our BNP Paribas FX Positioning monitor continues to report that short JPY is the largest FX market position and is dangerously large at -41 on a scale of -50 to +50.
– AUD firm, NZD slips on soft data…….dovish Yellen
The AUD has generally been trading with a firmer tone since the start of the week. Although the recent encouraging economic news from China has not necessarily translated into a broader improvement in risk sentiment, AUD in particular has received a boost. In addition to China, we also expect the Federal Reserve policy actions to offer support to the Asian currencies into year-end. Fed Vice Chairman Janet Yellen recently commented that policymakers should link the low rate commitment to economic goals, rather than calendar dates. Although she also said it was hard for the FOMC to achieve a consensus forecast for the economy, the Fed has been evidently under-delivering on the employment part of its policy mandate. This statement should imply ongoing QE, with positive implications for AUDUSD, which we see at 1.08 by year-end. In the near-term, AUDUSD needs to clear the November high of 1.0480 to signal further upside. In contrast, the NZD fell after Q3 retail sales unexpectedly fell by 0.4% q/q. We maintain a short NZDCAD trade recommendation, targeting 0.7970.
BNP Paribas