– Long EUR beyond any short-term disappointment from ECB Sep 6
The short end of euro area bond markets have rallied (both Spain and Italy 3Y -30bps) in response to reported comments from ECB Draghi that sovereign debt purchases of up to three years would not be state financing helped markets further. However, EUR crosses are flat and are not following the move today, perhaps reflecting some caution ahead of Thursday’s ECB meeting. The ECB meeting will be crucial; our economists expect the ECB to lay out a framework for sovereign debt purchases. 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. Chances are high for a disappointment in markets, with the ECB unlikely to tick all boxes on the day. However, we would look through the short term disappointment given (a) EUR has also not rebounded as much as euro zone CDS would suggest (see chart), and (b) the market continues to remain short EUR. We continue to hold long recommendations on EURUSD and long EURJPY (targeting 1.28 and 101.63). Today, we would keep an eye on comments from ECB Asmussen (14:00 BST) who speaks in the presence of FinMin Schaeuble. In weekend commentary, Asmussen continued to back ECB Draghi and actually noted that any new bond buying plan would be an improvement given the ECB would not have senior credit status.
– AUD stabilises after RBA statement; Weakening mining outlook a risk
AUD has stabilised after the RBA statement came in more on the neutral side, reiterating that recent rate cuts had still to work its way through the economy. However, there were cautious undertones on China with Governor Steven’s noting that the recent indicators had added uncertainty over near term growth, while acknowledging that prices of some key resource exports had falling sharply in recent weeks. Indeed, iron ore prices are over 20% lower over the past month alone. While AUD could see some improved tone today, the sharply deteriorating outlook for mining could continue to weigh. News that Australia’s third largest miner has cut its investment spending by near 25% could continue to resonate. Looking ahead, the monthly batch of activity/inflation data from China (due 9-10th) will be important. However, our economists point out that the risks to activity could be on the downside, noting weaker order/inventory balance from survey data. As such, while AUDUSD could recover from oversold levels as flagged by STEER, the currency could remain weaker on the crosses.
– Scope for USD to weaken with QE3 still being priced in
The market reaction to Friday’s Jackson Hole comments suggested that not much was being priced in before hand; US 10Y yields fell sharply and gold rallied strongly, following on from their movements induced by the more dovish FOMC minutes (released Aug 22). Given that these moves are now beginning to take off (especially gold- having been subdued for months), there appears much more scope for sections of the market to continue to price in QE3 which our economists look for come the Sep 13 FOMC. EURUSD should continue to benefit from such expectations. The CFTC-implied aggregate USD position has only recently moved into negative territory for the first time since September 2011, suggesting still plenty of scope for the market to build up short USD exposure. Should the focus shift to USD crosses (and away from EUR crosses) into next week, GBPUSD could track EURUSD higher and target the 1.6000 area.
– NOKSEK to continue to gain ahead of Riksbank
NOKSEK has continued to move higher a cleanly taking out 1.1500 and now targeting 1.1611-1.1635 resistance (100-200 dmas). The move could gain further traction from the data flow; Wednesday’s Norway PMI is expected to rebound above 50, while manufacturing production is tipped to rise 0.3% m/m (vs. expectations of 0.3% decline). Our economists look for the Riksbank to sound dovish at their meeting on Thursday, signalling a 25bp rate cut at its October meeting. We continue to hold our long NOKSEK recommendation (entry 1.1310 on 9 Aug) targeting 1.1700 with a stop at 1.1200.
BNP Paribas