– Central banks in the spotlight this week; further AUD gains ahead
Central bank meetings – RBA, ECB, BOE and BOC — are in the spotlight this week. Of focus tomorrow, the RBA policy announcement will offer some opportunities for AUD, given that a 25 rate cut is nearly fully priced in by the markets. The weaker Aussie economic data– retail sales unchanged in November against expectations for a 0.4% MoM gain coupled by the fall in operating profits to -2.9% QoQ from a revised -0.3% in Q2 — has heightened the odds of a rate cut tomorrow. An ‘as expect’ cut could result in a knee-jerk AUDUSD selling reaction, but given that the cut is largely priced in, downside in AUD should be fairly limited and be viewed as a buying opportunity. An unchanged decision would be very positive for AUD. Regardless of outcomes, the RBA meeting will remove a source of uncertainty, while other factors remain supportive of AUD gains. These include a looming expansion to the Fed’s QE3 and an improved growth outlook China evident from the rebound in the November Chinese official (to 50.6 from 50.2 in Oct) and HSBC flash manufacturing PMI (to 50.5 from 49.5 in Oct) prints. We maintain an AUDUSD long trade recommendation entered at 1.0390, targeting a gain to 1.0850.
– Watch ECB and Eurogroup meetings, and the progress on Greek debt buyback; stay long EURCHF
ECB and Eurogroup meetings, as well as the progress on the Greek debt-buy back will be the key drivers for EUR this week. Another Eurogroup meeting kicks off today, followed by an EU finance ministers meeting tomorrow. The focus of the meeting will be to work towards finalizing any further details on the Greek agreement, discuss whether Portugal and Ireland would get same concessions and to discuss the Cypiot rescue program although a final decision is not likely to be made at this stage. On Greece, the Greek Debt Buyback scheme will start today with offer to end December 7. The process itself will finish December 13, according to reports in the Kathimerini with the Troika to deliberate on its success, or not, on December 10. Press reports last week suggested that Greece could target up to EUR 68bn of bonds, including government bonds not included in the PSI back in March, in a bid to reduce its public debt by around a net EUR 20bn, at least (it is to receive a loan of an estimated EUR 10bn from the EFSF to conduct the operation). Reportedly, the price to be offered to investors will vary depending on the bond, which should help bolster the take-up of the scheme. Our view remains that Greek will receive its December tranche of loan, which will keep the EUR supported. On Thursday, the ECB should leave policy unchanged with an economic assessment similar to the one from the November meeting. The new staff projections should reinforce the message of a gradual recovery. We think the OMT is the most likely policy tool to be activated going forward, although the timing is out of ECB’s control. We still expect a Spanish aid request to occur in Q1 2013, which would be positive for eurozone risk sentiment and the euro. A restatement of OMT should reinforce the more positive eurozone tone. Our weighted peripheral spread indicator suggests that EURCHF is likely to move higher from current levels (see chart). We maintain our long EURCHF trade recommendation targeting a rise to 1.25.
– NFP to distract from watching the fiscal-cliff talks, USD is still a sell
Friday’s November non-farm payrolls report should a least for a time shift the market’s focus away from the fiscal cliff and to the Fed outlook. The hurricane Sandy’s impact was already evident in the recent jump in jobless claims and we expect November payrolls to show a meagre 25K gain, which is some way below the current consensus expectations for a 90K increase. Even accounting for the weather impact, it is clear that the Fed continues to see the progress on employment as disappointing. A soft November number would support our call for a shift to outright Fed Treasury purchases at the December meeting, which is yet to be fully reflected in the FX markets, in our view. Our overall approach remains bearish on the USD as we prefer to ‘fade the cliff and play the Fed’ ahead of the December 12 FOMC meeting.
BNP Paribas