* Eurozone political and ECB developments in focus. EUR upside beckons
EURUSD continues to trade 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 PM 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, there is a 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.
* 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.
* Upward revision to UK GDP but details weak; GBPUSD Still vulnerable higher
As expected, UK Q2 GDP revised to -0.5% q/q vs -0.7% q/q. But, more worryingly all the underlying components disappointed mkt expectations: investment and exports were particularly weak. The massive stimulus announced by the BoE & govt in July (which totals almost £200bn, or 13% of GDP) looks entirely justified. GBP may be a little softer on the back of this, but Cable in particular remains vulnerable to a move higher in the next few weeks in our view. For the past two months, GBPUSD has been a slave to EURGBP; the “EUR” side of the equation has hogged the limelight with EURUSD and EURGBP strongly correlated. But with US QE3 now being priced in with more vigour, the USD leg is begin to move. As such, the breakout in GBPUSD will have legs with 1.6000 an easy target. Short dated Cable volatility still looks very cheap.
* 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.
BNP Paribas