* Eurozone political and ECB developments in focus. EUR upside beckons
As the London morning starts, EURUSD is trading close to seven week highs at 1.2550 – 1.2600. The market focus still remains firmly on the ECB’s extraordinary policy response on which details are not yet fully available. Still, the sharply lower eurozone peripheral spreads relative to just a few weeks ago and continued lower eurozone sovereign CDS levels signal further broad EUR upside (see chart below). The meetings between the Greek prime minister and the German and French leaders will continue over the weekend but no compromises should be expected until after the Troika review/report, which is due in September. The next key eurozone events will be the finance ministers’ meeting on September 3 and the ECB policy decision on September 6. Today, the key headwind will be the Spanish Cabinet meeting. Reports yesterday suggested that Spain was in talks with the eurozone over the terms of the sovereign aid package, but a decision would not be made until 12 September, at the earliest. The combination of declining eurozone stress and mounting expectations for QE3 from the Fed should continue to be supportive for the EUR. EURUSD will likely accelerate to the top side, 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. We also added a long EURJPY recommendation at 98.50, targeting 101.63.
* We took profits on our short USDCAD position and went long AUDUSD
We booked a 3.16% profit on our short USDCAD trade recommendation, which was established on 12 July at 1.0240. We closed our position at 0.9925 above our original target of 0.9800. The CAD has outperformed within the commodity bloc over the past month, but recent soft data from Canada have weighed on the CAD. We continue to favour commodity currencies against the USD, ahead of the 13 September FOMC meeting and now expect the AUD to outperform. With further stimulus from China likely, the outlook for the AUD is likely to improve. This means that the market may continue to price out rate cuts from the RBA, boosting the AUD. Thus, we are targeting a rise in AUDUSD to 1.0800 in the months ahead. For further details, please see our FX Weekly: Adding EUR Longs: Switching USD Shorts, 23 August 2012.
* Upward revision to UK GDP likely to boost GBPUSD
The second release of UK Q2 GDP today is likely to be revised higher. The first release was weak and based on several assumptions for June data; but since then, the June data have shown that Q2 may not have been as bad as originally perceived. While the data will show that GDP declined for the third straight quarter, it should still provide a boost to the GBP, particularly against the USD. EURGBP will continue to be guided by events out of the eurozone.
* US Durable Goods to improve for the month of July
US Durable Goods orders for July, due out today, are expected to increase by 2.3%m/m, due to the surge in Boeing orders. Core Capital shipments are expected to be slightly weaker than what we usually see in the first month of the quarter. The pace of shipments is slowing in Q3, but should still contribute positively to GDP growth. Upside data surprises will likely lead to very little reaction from the markets in terms of scaling back expectations of Fed QE. The FOMC minutes on Wednesday set the bar high for the Fed not to proceed with QE. Thus, we continue to see the USD under pressure heading into the Jackson Hole meeting on 31 August.
BNP Paribas