– Focus to shifts from US to Europe post Bernanke and ahead of the ECB meeting on 6 September
Fed Chairman Ben Bernanke’s highly anticipated Jackson Hole speech confirmed the dovish tone from the most recent FOMC minutes. Most importantly, the speech suggested that Bernanke is one of the “many” participants at the last FOMC meeting who thought that more policy accommodation would be appropriate. Our economists expect that further easing at the FOMC meeting this month is highly likely and we continue to favour short USD positions, especially against the commodity currencies. For this week focus shifts to the Europe with Thursday’s ECB meeting the main event. Our economists expect the ECB to lay out a framework for sovereign debt purchases. The key issues the ECB will need to address include seniority, the transparency of the process and how existing EU/IMF programme countries will be treated. Our positioning analysis suggests that an optimistic outcome has not yet been priced into the EUR, with investors remaining net short EUR. The EUR has also not rebounded as much as eurozone CDS would suggest. We therefore continue to recommend long EURUSD and long EURJPY positions (targeting 1.28 and 101.63) despite a high likelihood that the ECB will cut the repo rate this week.
– European manufacturing PMIs disappoint; UK PMI is the positive outlier
This morning’s European PMI releases generally disappointed, with releases for France and Germany softer than previous flash estimates at 46.0 and 44.7 respectively, while PMIs for Italy, Switzerland and Sweden were weaker-than-expected. The largest negative surprises were from Sweden (45.1 vs 50.1 expected) and Switzerland (46.7 vs 49.1). Hence, a decline in manufacturing in the small, open, trade surplus economies suggests that the slowdowns in the eurozone and Asia are impacting export volumes. UK manufacturing PMI was an outlier amongst this morning’s PMIs rising to 49.5 from 45.2 (consensus: 46.1). This is welcome news for the UK economy, but the volatility of the series is likely to prevent investors positioning long GBP following this release. We favour EURGBP moving lower in the medium-term, but for now a rally in the EUR is likely to provide a better entry point to short the cross over the months ahead. Meanwhile, an improvement in UK data should at least mean that GBPUSD can continue to move in line with EURUSD. We therefore expect cable to reach 1.6000 as EURUSD heads towards our 1.2800 target.
– Swedish data supports long NOKSEK recommendation ahead of Riksbank
This morning’s weak Sweden PMI (45.1 vs 50.1 expected) supports our economist’s outlook for the Riksbank to signal on Thursday that a 25bp rate cut is likely at its October meeting. We continue to favour long NOKSEK, with a sustained break above the 55dma at 1.1440 opening the 200dma as the next target at 1.1636. For today, 1.1500 has been providing some resistance. The cross should also be provided with some support this week by Norwegian data flow: the PMI released on Wednesday is expected to rebound above 50 and our economist’s expect Norwegian manufacturing production to rise 0.3% m/m, stronger that mkt expectations for a 0.3% decline.
– Scope for AUD to rebound if RBA meeting confirms previous statement
The AUD has underperformed the CAD and NZD, and even a soft USD, in recent days as Chinese growth concerns have continued to cause investors to unwind long AUD positioning. The accompanying statement to Tuesday’s RBA minutes should indicate whether the Board shares these concerns. The minutes on August 21 surprised the market with a hawkish tone as a rate cut had not been discussed at the August meeting. For Tuesday’s meeting the interest rate market has only priced about 4bp of cuts, so a 16% probability of a 25bp cut. Meanwhile, BNP Paribas STEERTM indicated that AUDUSD has been oversold, providing plenty of scope for AUD to rebound if the RBA meeting confirms that a rate cut is not being considered.
BNP Paribas