* Waiting for a dovish speech from Fed Chairman Bernanke
As markets wait with bated breath for Fed Chairman Bernanke’s much-anticipated Jackson Hole speech, the USD has lost come of its ground against G10 FX but remains within recent ranges. In particular, AUDUSD has rebounded to 1.0320 after reaching a low of 1.0275 despite the Australian Finance Minister commented that the central bank has room to move if it chooses to do so, and remarked that the AUD strength is a challenge for companies. The market is already fully pricing in a cut by the RBA at next week’s meeting. However, our economists foresee a cut in October; thus, this should give the AUD a push higher. Ahead of the RBA, expectations are for a dovish speech from Fed Chairman Ben Bernanke at Jackson Hole, reaffirming the recent August minutes of the FOMC meeting. If Mr. Bernanke signals that QE3 is imminent, then this should solidify our USD bearish view and provide a catalyst to drive commodity currencies higher. We favour EURUSD and AUDUSD higher and USDJPY lower. The risk, however, is for disappointment and would likely result in a negative market reaction. Today’s Chicago PMI and Michigan Sentiment for August will play second fiddle to the chairman’s speech.
* Canadian GDP likely to disappoint
USDCAD has risen back above 0.9900 over the past week. While Bernanke’s Jackson Hole speech will be the key catalyst behind the moves in USDCAD, today’s Canadian GDP will also be important. We expect Q2 GDP to come in slightly lower than consensus at 1.5% q/q saar vs 1.6% q/q saar. Q2 is likely to have been dragged down by a weak consumer, exports and the fiscal drag. The economy remains imbalanced and dependent on residential and business investments as the main drivers of growth. Given that this is below the BoC’s projection for growth of 1.8%, the BoC is likely to remain on hold for some time. Thus, while USDCAD could be dragged lower if Bernanke delivers a dovish speech at Jackson Hole, the CAD will likely suffer on the crosses as growth continues to underperform.
* Soft Norwegian retail sales weighs on NOKSEK, provides buying opportunity
NOKSEK pared back some of its recent gains following a softer-than-expected retail sales print – contracting 0.1% m/m vs +0.4% expected. However, the release is often volatile and the range of consensus estimates was -0.5 to +1.2%. We view that the pull-back in NOKSEK is overdone and provides an opportunity for investors to add to, or enter, long NOKSEK positions. The SEK could really come under pressure next week if the Riksbank, as we expect, signals a cut in October. As such, we continue to hold our long NOKSEK position targeting 1.1700.
* Japanese data disappoints…..we like EURJPY higher, targeting 101.63
Japan released a slew of data this morning that largely disappointed markets. Preliminary industrial production unexpectedly pulled back by 1.2% over Jul in stark contrast to forecasts on a 1.7% gain and following a modestly revised upwards 0.4% rise in June. Japanese overall household spending fell by a further steep 1.3% over Jul, more than forecasts centred on a 0.3% decline and following a similar 1.3% fall prior. Japan’s unemployment rate held steady at 4.3% in Jul, right in line with market forecasts. Core nationwide inflation declined for the 3rd consecutive month, adding pressure on BOJ to unleash further easing measures to meet its 1% inflation target. Headline core inflation fell by a further -0.3% y/y in Jul, right on par with market forecasts and following a -0.2% decline prior. Ex fuel and food, prices fell by a -0.6% y/y pace (f/c -0.6%), same as prior, whilst Tokyo core Aug prices as a more up to date precursor slipped by -0.5% y/y (f/c -0.6%) vs -0.6% prior. We continue to expect the BOJ to only do the minimum required to reach its stated 1% inflation goal. Accordingly, independent JPY weakness is unlikely to emerge. We maintain an active long EURJPY recommendation targeting the recent highs at 101.63 but we believe the principal driver will be a more positive outlook for the EUR.
BNP Paribas