– AUDUSD to retain its upside bias
Australia GDP rose by a modest 0.5% QoQ in Q3, slightly below the forecast an unchanged forecast of 0.6%. On an annualised pace, growth was in line with expectations at 3.1%, easing from 3.7% in Q2. Post-release however, Treasury Swan’s said that the figures are impressive given the global slump. The GDP print did little to derail the uptrend in AUDUSD, especially against a positive risk-on session. Of note, the Shanghai Composite index rose sharply (up about 3%) above the 2,000 support on reports that the CIRC have lifted its limit on insurers to invest in banks equity. Insurers can now invest up to 3% of their total assets in a bank. In addition, the first Chinese Politburo meeting on economic development in 2013 yesterday was constructive and has the stage for the central economic meeting (expected to be held in mid-December of which growth and related macro policy in 2013 will be set). The initial reports suggest that the new standing committee of the politburo will turn its focus to urbanization, potentially demanding more simulative measures such as infrastructure spending. The continued improvement in global risk sentiment as tail-risks are minimized coupled with the improvement in Chinese growth outlook should see rate cuts priced out, in favour of the AUD. The slew of monthly Chinese economic prints on 9 December will be watched. Our expectation for CNY appreciation (6.02 by end-2013) and expected USD weakness on the back of outright US treasury purchases by the Fed on December12 will also benefit the AUD. We stay with our long AUDUSD trade entered at 1.0390, targeting a gain to 1.0850.
– GBPUSD to sail through the budget statement today
The UK Chancellor’s Autumn statement today should see some significant upward revisions to the borrowing projections. However we do not expect a particularly negative market reaction given that the Chancellor should be on track to meeting his fiscal mandate and as the broad profile of fiscal consolidation remains in place. We suspect GBPUSD’s main attention will remain focused on economic data (our UK economist expects the November UK services PMI to improve to 51.5) as well as broader USD themes. On the latter, US President Barack Obama said on Tuesday there was “potential of getting a deal done” although he also referred to House Speaker John Boehner’s proposal as “out of balance”. It is clear that markets have taken a benign view on the outcome of the fiscal cliff talks and while there scope for disappointment, we expect the agreement to be reached by the year-end deadline. On the data front, global services PMI data today should not change the risk momentum, while the US November ADP private sector employment estimate should be a precursor to a weak non-farm payrolls report on Friday and thus USD-negative. We see scope for a further 2%-3% rally in EURUSD and GBPUSD by year-end.
– Negative interest rate news lift EURCHF, stay long EURCHF
EURCHF is now in the spotlight as the pair has extended its rally above the 1.2150 level. The driver has been a developing story that Switzerland’s second largest bank will charge negative interest rates on CHF cash balances (above a certain threshold) held by financial institutional customers. However, the move does not look like a coordinated response by the SNB to weaken the CHF via capital controls (like that seen in the 1970’s) but more a response by the bank to adapt to needs to increase its capital ratio. For CHF, we do not believe that negative rates by themselves can lead to sustained currency weakness, since CHF has been used as a hedge against extreme eurozone scenarios. Instead, the principle driver would be the ongoing abatement of eurozone tail risks. The chart below compares our weighted eurozone peripheral spreads measure alongside EURCHF. The relationship between the two factors were strong before the SNB put the 1.2000 floor in place; the indicator now calls for EURCHF to lift more convincingly above the 1.2000 floor. We maintain our long EURCHF trade recommendation initiated in September at 1.2060, targeting 1.2500.
BNP Paribas