– BoC could undermine CAD on crosses, but less so on USDCAD
The focus today remains on the commodity currencies. The CAD could weaken on crosses (vs. NZD and AUD) with a dovish signal from the BoC statement/ policy report (15:00 BST) and the press conference (16:15 BST). NZDCAD could break above strong resistance near the 0.8400. USDCAD, on the other hand, already appears a big figure expensive relative to swap spreads, and has more downside risk on a multi-week view. While rates will be on hold, our economist expects a downgrade to the BoC’s growth outlook, with Q4 GDP set to undershoot the BoC projection by a percentage point. Our economists have pushed back their call for the BoC to raise rates by a full calendar year to mid-2014. While the BoC’s hawkish bias is unlikely to be unwound completely, CAD is at a disadvantage within the commodity bloc with the most tightening priced in for the next 12 months (+14.5bn for CAD vs. -50bps AUD, +6bps New Zealand). A short-term ranking of the commodity bloc based on interest rates would place NZD at the top, followed by AUD and then CAD. Our FX positioning analysis also reflects this view with long CAD exposure already the most modest.
– GBP appears oversold; BNP STEERTM flags long GBPUSD
Amid the distractions of dovish comments from BoE King yesterday and PM Cameron’s proposed “in-out” referendum, Sterling is beginning to look extremely oversold. BNP Paribas STEER indicates the undervaluation is at levels that preceded recent recoveries in GBPUSD (see chart); we initiated a buy recommendation (entry 1.5860, 1.6185 target, 1.5700 stop) yesterday. Today’s BoE minutes were as expected; Miles was once again the sole voter for more QE. But the minutes placed less emphasis on more QE and more on the need for a lower GBP TWI to help rebalance the economy. This is also not a surprise, and the BoE has long wished for a weaker GBP but have not received it despite their QE programme. We do not believe their wish will be granted and further Fed balance sheet expansion (1.2-1.7trn by mid-2014) alongside our call for the UK to outperform the euro zone growth-wise should see GBPUSD trade higher. The stronger UK jobs data today (unexpected fall in jobless claims and lower than expected ILO unemployment rate) highlights that there are bright spots in the economy. On PM Cameron’s EU speech, a 2018 referendum on EU membership is possible assuming that the conservative’s are re-elected. Our UK economist believes the short-term macroeconomic impact will be limited.
– EURSEK has further upside on a weaker jobs report on Thursday
An initial wobble in the EUR has been swiftly reversed yesterday, helped by stronger economic data (German ZEW), and we expect Thursday’s PMI prints to improve further. Our long EURSEK recommendation (targeting 8.80) remains one of our favoured ways to position for a stronger EUR, and we think a weaker Swedish jobs print on Thursday (jobless rate expected higher at 7.8% vs. 7.5%) could provide another catalyst. The Riksbank has recently been more mindful of the softening of the labour market. Deputy Governor Ekholm this morning said that the relative strength of SEK could provide further room for rate cuts. NOKSEK has been the main mover today, breaking above the 1.1700- a two-week high.
BNP Paribas