With weaker growth indications from China, stay selectively long commodity bloc
China’s weaker than expected July purchasing managers’ index (which dropped further into contractionary territory at 47.7) coupled with a softer headline reading in Australian CPI inflation was enough to scupper the AUD. The dip in headline inflation (to 2.4% y-o-y) contrasted a clip up in underlying inflation. All said, an August rate cut from the RBA is still on the cards, according to BNP Paribas economists. Rate markets too are pricing in a roughly 60% chance of a 25bp rate cut on August 7. Notwithstanding the growth surprises in the Asia Pacific (Japan’s trade data too improved by a smaller margin than expected), we judge that AUD remains oversold, a theme consistently flagged by BNP Paribas FX Positioning Analysis. Moreover, with Chinese Premier Li recently repeating his 7% “bottom line” for 2013, adding to hopes for further stimulus measures in China, recent gains in regional equity markets would likely signal further AUD upside (see chart). Tradingwise, our EURAUD bearish seagull recommendation is expected to expire flat today (original structure was zero-cost), but we continue to see scope for commodity currency outperformance in the near-term, and remain short EURCAD in our spot recommendations portfolio.
Read the full report: FX Daily
BNP Paribas