– Fade the fiscal cliff via USD shorts; NFP could shift focus to the Fed
The US dollar is likely to remain affect by US negotiations to head off the ‘fiscal cliff’. Here, good news is bad news for the USD, because of the negative correlation with risk sentiment. However, interestingly the markets placed more focus on the better US housing and softer labour data (initial jobless claims) yesterday, shrugging off negative comments from US politicians. Next week’s US economic data could shift a little bit of the market’s focus away from the fiscal cliff talks and more towards the prospect of Fed easing. Market expectations may be revised down after weaker jobless claims (we are forecasting 25k for November, well below the 95k consensus). Softer employment data should see the market move to price in outright US Treasury purchases by the Fed, given the Feds response remains a function of progress on employment. Potentially stronger Chinese PMI and US ISM would also provide positive risk catalysts at the beginning of next week. We do not believe the Fed move to buying US treasuries (our forecast on December 12) is adequately discounted into markets and should see the USD weaken. We continue to favor selling into USD rallies, with the EUR, GBP and commodity-bloc currencies (AUD, CAD and NZD) all seen gaining into year-end.
– Norges Bank inaction on NOK sales could boost NOKSEK
Recent Swedish data has been mixed, suggesting a stronger growth momentum in Q3 but a soft start to Q4. The data is unlikely dislodge our view that the Riksbank cuts rates on Dec 18, with the rates market only priced for about 10-12bps at that meeting. Meanwhile, the Norges Bank would normally announce the month-ahead daily sales of NOK for December today (the last day of the month). However, in October the Norges Bank stated that no further sales of NOK were required this year, suggesting that the Norges Bank will stand back from the FX market in December and will not make an announcement on Friday. We expect the lack of Norges Bank participation in the FX market to remain a supportive factor for the NOK in December. A positive print on Norway’s October retail sales on Friday would also add to the positive NOK picture. Our two-year swap ratio indication continues to indicate that NOKSEK has scope to move higher and we maintain our long NOKSEK recommendation, targeting 1.1940.
– Focus on German vote; EUR a buy as EZ risk-premia compress further
The focus will today be on Germany’s vote on the Greek aid package later today (0900 GMT), which we expect to go through. Our eurozone CDS measure continues to flag positive EUR signals even at the current stage. Despite only a modest news flow on Greece (a press report suggested the government will borrow EUR 10-14 Bn. to fund debt buybacks), risk-premia in the eurozone have continued to compress. Spain’s 10-year government bond yields are down to the lowest levels since March, while Italy’s 10-year yields touched the lowest level since December 2010. Meanwhile, Spanish and Italian 5Y sovereign CDS have been moving lower in a straight line fashion since mid-November. In economic data, eurozone November economic confidence and German unemployment were firmer than expected, although it is too early to suggest economic activity has bottomed out. Friday brings November ‘flash’ eurozone CPI which we see slowing to 2.3% y/y. Acknowledging some near-term risks from the volatile US fiscal cliff headlines, we maintain our view that EURUSD should strengthen to 1.33 by year-end.
BNP Paribas