*FX to yet price QE3; EURUSD to accelerate towards 1.2700 into next week
As anticipated, the FOMC minutes yesterday came in on the dovish side invigorating QE3 expectations. USD has been hurt vs. G10 FX, but more so against Asian and CEMEA FX. But bigger picture, markets are finally beginning to price in QE3; the sharp pullback lower in the US 10Y yield (now 1.70% vs. 1.86% yesterday) and the breakout acceleration in gold (XAUUSD) play to this view. USD will weaken further with our economist’s call for further QE3 come September. EURUSD will likely accelerate to the topside, testing 1.2680/1.2700 resistance levels into next week. The market is still short EUR according to our FX positioning analysis. We hold our long recommendation targeting 1.2800. European PMIs were stronger (especially manufacturing) but we doubt this is the focus for EUR at present, with ECB rate expectations secondary to the hope the ECB comes in with some innovative way to lower peripheral yields. The German press reported that the ECB had been in discussions regarding new sovereign bond variations purchases involving secret caps (rather than an official) for interest rates. Greek PM Samaras’ meetings with German Chancellor Merkel and French President Hollande will be a focus. But Merkel has already toned down expectations for a conclusion come Friday, stating that any decision to lighten the Greek austerity programme may not come before the Troika review which in September.
* China PMI disappoints; Should see anticipation of Chinese policy easing pick up
AUD has continued to lag today, with AUDUSD holding flat. This is likely on account of the weak HSBC Flash, which showed the lowest headline since November, with new export orders sub-index at the lowest since March 2009. But expectations of a strong policy response have continued to support Chinese asset markets should pick up from hereon in and perhaps explain why Chinese stocks continue to hold in well . Indeed, PBOC Governor Zhou Xiaochuan said adjustments to interest rates and banks’ reserve requirements are still possible even after the CB conducted a large reverse repo (temporary cash injection).
* Norway GDP stellar; NOKSEK to grind higher
NOKSEK has continued to grind higher, though the cross was not particularly inspired by today’s Norway GDP with the focus on the USD and QE3. However, the GDP figure was strong; up 1.2% q/q (1.3% consensus) with an upward revision to Q1 (1.5% vs. 1.4% prior). The details were stellar; investment posted the most impressive quarterly growth rate, rising 2.7% q/q, but private consumption also made another strong contribution in Q2, rising 1.1% q/q for the second consecutive quarter. Such data will set Norway apart from the rest of the advanced economies that continue to struggle. Thus, we remain confident in our long NOKSEK recommendation, targeting 1.1700.
* Dovish FOMC minutes support BNP call for QE3
The FOMC minutes were quite dovish and are consistent with our economists’ view that QE3 is more likely than not in September. The key sentence in the minutes was that “many members judged that additional monetary accommodation would likely be warranted fairly soon unless incoming information pointed to a substantial and sustainable strengthening in the pace of the economic recovery”. This language is quite similar to that prior to both the implementation of Operation Twist and QE2. But the key will be whether or not Fed Chairman Ben Bernanke is among the many members who thinks additional monetary accommodation would be warranted fairly soon. We will have to wait until the Jackson Hole conference to get the answer to that question. Nonetheless, the Fed has set the bar very high for not doing QE, highlighting that incoming data would need to point to a substantial and sustainable strengthening in the pace of the economic recovery. QE3 will weaken the USD.
BNP Paribas