– Fiscal-cliff jitters positive for the USD, but not for long
FX markets are trading against a more subdued global risk backdrop with US equities closing in the red and US Treasuries trading firmer. US Treasury’s decision to not label China as a currency manipulator in its semi-annual currency report despite reiterating that CNY remains ‘significantly undervalued’ had muted impact on the markets. For near-term trading, we flag some warning signals from technical charts in vols – a bullish trendstall on VIX daily chart warns of a pick up in vols from the floor found at 15.00. Similarly, the V2X index shows a bullish trendstall signal, suggesting USD could see bouts of safe-heaven demand in the near-term, if the fiscal cliff uncertainty is not resolved. Overnight trading revealed that comments from Senate Majority Leader Harry Reid that there has been “little progress” in the negotiations to avoid the fiscal cliff overshadowed the encouraging set of US economic data, where core October durable goods orders rose by 1.7% m/m and November consumer confidence climbed to 73.7 (a four-year high). However, we think that it should be of little surprise that the talks are proceeding slowly. We still believe the motivation to avoid a substantial negative impact of the fiscal contraction on the economy (and a likely US recession) is strong with both parties, suggesting that a deal will be reached eventually. The timing is uncertain however, and the middle of December can be seen as a relatively optimistic scenario, although one that we are still leaning toward. On balance, we continue to favour positioning for USD weakness into the December 12 FOMC announcement, which is expected will probably set the tone for the USD over the mediumterm. In particular, we maintain a long AUDUSD trade recommendation entered at 1.0390 last week, targeting 1.0850. We expect AUD to remain resilient given the expected improvement in the China’s growth outlook.
– Limited downside for EURUSD, the EUR more vulnerable on the crosses
FX market reaction to the announcement of the agreement on Greece suggests some reservations about the deal. To the extent that the successful debt buybacks are a pre-requisite to the other key elements of the program (reduction of the interest rate and increasing maturity on bilateral loans, deferring interest payments on EFSF loans, and the ECB foregoing profits on its Greek SMP bond holdings) the announcement added another layer of uncertainty for the financial markets. The debt buybacks are due to be completed on December 12, a day before the Eurogroup meeting at which a “formal” decision will be reached to make the aid disbursement. Before that, national procedures (like approving changes to aid programme in Germany, Finland, etc) will have to take place. The Germany’s Parliament will vote on Greece’s aid package later this week. In our view this signals some renewed EUR vulnerability on the crosses. We favour EURGBP downside in particular, as we see the UK economy outperforming the Eurozone economy next year. However, we also believe that the eurozone policymakers have little choice but to find a way to finalize the Greek package by the agreed dates, as the alternative would be very negative for European sentiment. Given our dovish Fed outlook, we see limited near-term downside for EURUSD, and still expect the pair to strengthen to 1.33 by year-end.
– NOKSEK rally has further to go
NOKSEK has recovered about half it’s past week’s decline following sharply weaker leading economic indicators from Sweden. Both consumer confidence (-7.4 vs. -3.5 exp) and economic tendency survey (86.0 vs. 91.5 expected) suggest that the economy is slowing. Sweden has strong trade linkages to Germany and tends to under perform when German growth is softening (See chart). Declining SEK demand on receding eurozone tail risks is also a factor working against SEK. We look for the SEK to under perform both the EUR and NOK. We continue to hold onto our long NOKSEK recommendation (established 17 October) from 1.1675 targeting 1.1940 with a stop at 1.1535.
BNP Paribas