– We target NZDUSD higher with QE3 yet to be priced in
Risk-taking got another shot in the arm after the German constitutional court ratified the ESM with some conditions (as expected-more below) and also implicitly backing the two-pronged approach of the ESM/ ECB framework for euro area bond purchases. Shares are rallying with broad based gains across sectors, confirming that yesterday’s caution was indeed linked to anxiety ahead of the ESM ruling. The weaker German Bobl auction this morning also suggests that safe-haven demand requirements are falling, also supporting our bullish risk assessment. Investors are becoming more convinced about the idea that the Fed may initiate another round of QE, and our bearish USD call is playing out as anticipated. We reiterate here our analysis that with investors only still neutral to long USD, FX is not positioned for QE3 on Thursday, thus USD can weaken. We positioned for this via a long NZDUSD recommendation yesterday from 0.8150 targeting 0.8470, stop at 0.7965. In addition, we added a relative value trade based on our STEER model, long NZDCAD targeting 0.8190. According to our model, both NZDUSD and USDCAD appear cheap, supporting the bullish case for NZDCAD.
– German Court ratifies ESM, removes hurdle before Thursday’s FOMC
The German Constitutional Court ratified the ESM as expected and clearing a key hurdle ahead of Thursday’s FOMC decision. Our economists’ expectation was that the court allows ESM ratification with conditions, which is indeed what happened. For FX, the result plays to our view that the Germans are, for the most part, continuing to back the dual ESM/ECB bond buying plan which was a key factor behind the strong EUR rally seen since the end of July. The condition was that the German liability in the ESM (currently 190bn) remains capped at 190bn. Our economist notes two takeaways: (1) this won’t delay the President signing off on the ratification and (2) the EUR 190bn cap is not set in stone, and any approval to change this (increase/decrease the total authorised ESM capital) this would require new approval by the Bundestag (upper house) in addition to existing condition of approval by national governments. We continue to remain bullish on EURUSD (target 1.30 by end Q3) and hold long EURJPY and EURCHF.
– Cable rally should continue in line with our out of consensus bullish GBPUSD call
Cable has rallied strongly above the 1.6000, tracking the move higher in other USD crosses (EURUSD included) reinforcing our view that USD weakness could take GBPUSD higher, and closer to our Q3 end target of 1.6700 (Bloomberg analyst consensus is 1.5500). While the quarter-end target looks ambitious, BNP Paribas FX Strategy have had a clear view of USD weakness, and thus have been consistently forecasts that the odds are that GBPUSD was more likely to break 1.6000 rather than 1.5000 in recent months. The 1.6140 region (line of highs since April) provides stiff resistance near term, but the bias remains for a move higher. The data from the UK has been more positive of late, with labour market data today following from yesterday’s better trade report. Stronger August data with an improvement to July data (on both claimant count and jobless claims) help at the margin.
– RBNZ and SNB meetings due over next 24 hours; Expect little FX impact
Aide broader developments related to the US and Euro zone, there are two central bank meetings to keep an eye on in the next 24 hours: RBNZ decision tonight (12 September 22:00 BST, early Asian morning) and the SNB decision tomorrow (13 September, 08:30 BST). Both should be non-events in our opinion with policy expected to remain unchanged. The RBNZ should acknowledge the strength of the domestic economy but express some concern over the external growth environment (China) and level of the NZD. However, official rhetoric has not hurt NZD in the past, and should not detract from our long NZDUSD recommendation. On CHF, given that we believe that the move higher in EURCHF is linked to lower peripheral stress (and not expectations of an imminent increase in the 1.2000 floor), we do not expect too much impact.
BNP Paribas