– EUR rally to take breather ahead of key events on Wednesday and Thursday
Asian shares are broadly lower up to 1% lower, the losses are spread across sectors, suggesting this may be broad riskreduction ahead of key events rather than any specific catalyst. Risk- appetite is likely taking a breather ahead of some key events starting with Wednesday’ German court ruling on the legality of the ESM and Dutch election, and the FOMC decision on Thursday. Headline risks could hurt the EUR today; there could be some potential for negative headlines surrounding Greece; Kathimerini reports that the Troika has “rejected” E2.2bn of the Greek government’s spending cuts, while voicing scepticism over a further E4 to E4.5bn of planned cuts. Accordingly, we wouldn’t be surprised to see EURUSD consolidate lower in the next 1-2 sessions with 1.2700 support potentially tested ahead of tomorrow’s German ESM ruling. Today, we also have Greek Prime Minister Samaras is scheduled to meet with ECB Chief Mario Draghi today along with the EU/IMF delegation (0945 BST). The FT reports that Samaras will ask ECB Draghi to aid the Greek situation by “not making a profit” on bonds bought from Athens below par. On the other hand, the AUD could show some out performance today given signs that Chinese policy makers are rolling our stimulus (both monetary and fiscal) at a strong pace (more below). Hence, today we may see EURAUD come under some pressure and back below the 1.2300 level in the days ahead. For EURUSD, given our expectation that the ruling goes through and that the Fed subsequently embarks on QE3 at Thursday’s meeting, EURUSD dips will continue to be bought up taking it to our 1.3000 forecast for September-end (Q3). We continue to retain long EUR exposure via long EURJPY and EURCHF recommendations.
– Spain continues to hold back from activating “Draghi Put”
ECB Chief Mario Draghi delivered on the details of the new bond buying program and assured markets that the ECB, in fact, is ready to step in when it is called to do so. With the ECB ready to act, the market’s focus from here on will be on the peripheral countries and whether or not they will be able to deliver on the conditions required of them. Hence, this “Draghi Put” could be affected by negative comments coming from politicians. Spain PM Rajoy’s comment that the ECB’s measure have been positive and made it less likely for Spain to seek a new aid package is a case in point. With bond redemptions due at the end of October, Spain is likely to continue to delay asking for support.
– Signs of Chinese policy stimulus to help AUD
The August activity data out of China have been disappointing, to say the least. IP growth, in particular, is concerning in that it is consistent with 7% GDP growth, which is below the official GDP projections. Nevertheless, we expect further stimulus to support both exports and infrastructure. Indeed, there are already signs of this: CNY new loans for August were CNY 703.9bn, higher than the 600bn expected and up from 540bn in July. Meanwhile, the NDRC (National Development and Reform Commission) approved 49 infrastructure projects on 5 September for an investment program totalling Rmb840b. According to the BNPP Head of Regional Industrial, the program includes 24 rail projects and 13 road projects. The construction cycle of the metro and intercity rail projects will continue through 2020. Our equity strategists believe that this should see China-A shares recover (See Derivative Lens – September 11, 2012). Accordingly, the AUD’s tone could improve somewhat in the days ahead.
– US trade data on the calendar for today
On the US data front, the trade deficit is expected to deteriorate as goods exports fail to follow through on the previous month’s gains. The June numbers helped to boost Q2 GDP higher, but given the global backdrop, a sustained improvement in the export data would be difficult to maintain. Rising expectations of QE3 and the announcement of QE3 on Thursday, as we expect, should result in USD weakness, which should help exports.
BNP Paribas