– Good news on the fiscal cliff is bad news for the USD, stay long AUDUSD
The USD remains sensitive to headline risk relating to the US fiscal cliff. Risk sentiment turned for the better overnight as House Speaker John Boehner said he was optimistic that the budget talks will avert the crisis “sooner rather than later”. President Barack Obama also hinted the deal could be done before Christmas. In addition, a newswire report suggested that the White House could be flexible on the issue of raising the top marginal tax rate to the Clinton-era levels. These latest signals are consistent with our constructive view on the outcome of the negotiations. Uncertainty is likely to linger for some time however; hence the USD is likely to trade in a back-and-forth mode in reaction to the US political news flow. Nevertheless, our favoured bias is to sell into the USD rallies ahead of what we expect to be a strong combination of USDnegative outcomes — fiscal cliff resolution, Fed’s boost to QE3 and the disbursement of further Greek aid –- in December. A busy US economic data calendar is due today. For the Q3 GDP report, we expect a below-consensus upward revision to 2.6% q/q (annualized), which would still be consistent with moderate pace of growth and ongoing Fed easing. We expect
carry to dominate the near-term trading theme and expect high-beta currencies such as the AUD, CAD and NZD to rally into year-end, targeting 1.08, 0.96 and 0.84, respectively. Australia’s Q3 capex data rose by 2.8% QoQ, better than forecast of 2%, albeit down from 3.4% in Q2. However, the downward revision of investment spending plans for 2012-2013 to AUD 173.4bn from AUD 181.5bn, especially in the mining sector, has led to an increased in market expectations for a 25bp rate cut on December 4. The OIS curve is now pricing in a 70% chance of a rate cut by the RBA next week compared to about 60% previously; but AUDUSD remain resilient. RBA’s Edward said that he is ‘reasonably confident’ about Australia’s outlook and that China’s slowdown seems less a ‘threat’ compared to mid-year’s assessment, suggesting that the risk appears to be on the upside for AUDUSD, should RBA keep rate unchanged next week. We stay long AUDUSD entered at 1.0390 last week.
– Bearish EURGBP as we expect softer eurozone data today
EURGBP reversed some of its losses on the back of positive US fiscal cliff and Greek debt buyback headlines yesterday. The Germany’s Parliament will vote on Greece’s aid package later this week. For now, the spotlight shifts to the slew of eurozone economic data due today. We are bearish EURGBP given our expectations for softer economic data, whilst the growth picture in UK is expected to outperform the eurozone. Our economists look for Germany’s November employment report to confirm the recent softer trend, with a 16,000 overall gain in unemployment. Similarly, the eurozone November economic sentiment should show further deterioration across the board to 83.7. The services, industry and consumer confidence indices should all signs of weakening as well. We like selling into EURGBP rallies, targeting a move to 0.79 by year-end and 0.76 by the end of Q2 2013. But given our dovish Fed outlook, we expect limited downside in EURUSD. We also believe that the eurozone policymakers will have little choice but to reach a decision to make the aid disbursement on 12 December, as the alternative would be too negative for European sentiment.
– NOKSEK rally has further to go
We expect Sweden’s Q3 GDP growth due today to slow to 0.1% q/q and 0.3% y/y, marking the slowest annual pace since Q4 2009. This data should thus support our expectations for the Riksbank to cut interest rates by 25bp on 18 December. We look for the SEK to under perform both the EUR and NOK. Our two-year swap ratio indication continues to indicate that NOKSEK has scope to move higher. We therefore maintain our long NOKSEK recommendation (established 17 October) from 1.1675 targeting 1.1940 with a stop at 1.1535.
BNP Paribas