* Weak China data set market tone, although light volumes keep price action limited
The combination of a light data calendar and a UK holiday kept volumes light and FX markets directionless. However, the main focus for FX markets has been on China. The decline in industrial companies’ profits for the fourth straight month verified concerns that the second-largest economy continues to struggle. In light of the weakness in the economy, Chinese policymakers, including Premier Wen, have called for extra measures to support exports and help meet economic targets. Further policy stimulus from China, whether it be monetary or fiscal, will be key in boosting commodity currencies, particularly the AUD. We do expect Chinese policymakers to employ further stimulus in the coming months. Still, the riskoff tone to this morning’s Asian trading has taken us out of our long AUDUSD recommendation (opened at 1.0470 23 August, closed at 1.0350) for a 1.2% loss. We will seek better opportunities to buy AUD.
* More positive rhetoric from the eurozone to support EUR – we like higher EURUSD and EURJPY
Germany’s Finance Minister Wolfgang Schaeuble said the continent’s two largest economies will create a working group to strengthen the eurozone’s fiscal and monetary union. Separately, the finance spokesman for German Chancellor Merkel’s party said that they were ready to give Greece more time on its targets. ECB’s Asmussen reiterated ECB Chief Draghi’s stance on bond buying. He highlighted that the ECB will only buy bonds with short maturities and stressed that the ECB’s bond buying programme would not finance governments. Heading into September’s slew of eurozone meetings and risk events, such headlines should be positive and alleviate concerns. We continue to believe that the EUR risks are to the upside; we remain long EURUSD, targeting 1.28 and EURJPY targeting 101.63.
* FOMC members weigh in their views on further monetary stimulus
In the lead up to the Jackson Hole meeting this Friday, markets are likely gearing up for a dovish speech from Fed Chairman Bernanke, especially following the FOMC minutes. Other FOMC members have expressed their views. Fed President Evans threw his support behind open-ended QE, while Fed President Pianalto acknowledged that additional bond purchases can boost growth if the risks are managed. Ms. Pianalto is a centrist dove and would likely need to be persuaded to forge ahead with QE. But, once again, the focus will be on Mr. Bernanke’s speech on Friday, as he reveals where he stands on QE and his view of the recent US data. Today’s consumer confidence data may add to the recent upside surprises in US data as it is expected to show a small increase on the back of a series of better-than-expected payrolls growth in July. However, the recent improvement is unlikely to change the FOMC’s view of the US economy. The minutes from the previous FOMC meeting highlighted that they would need to see significant improvement in data in order not to warrant another round of QE. The second estimate of Q2 GDP, due Wednesday, will affirm that growth remains below trend at 1.5%q/q (saar). Given our economists’ expectations of the announcement of QE3 at the September FOMC meeting, we remain bearish on the USD. We expect commodity currencies to benefit on the back of this.
* NOKSEK likely to head higher following the Norges Bank meeting
Despite the setback seen in NOKSEK after a positive surprise from Swedish retail sales, we expect the NOK to outperform the SEK; the Norges Bank meeting on 29 August could be the catalyst to drive NOKSEK higher. The Norges Bank noted that capacity utilisation appeared to have picked up slightly. With domestic economic conditions strengthening in Norway, the Norges Bank is bound to recognize the improvements in the domestic data. However, we do not expect the bank to hike rates this year. We remain long NOKSEK targeting 1.1700.
BNP Paribas