– Risk-off tone likely to linger ahead of Spain event risks on Thursday and Friday
The surge in US consumer confidence for the month of September failed to put an end to this modest risk-off tone dominating the markets. The price action in the market remains within a very tight range. With headline risk over Spain lurking, investors are likely to stay on the sidelines in anticipation of the release of the 2013 budget, reforms and the bottomup banking sector review due out on Thursday and Friday. Reports that the ESM would be able to diversify into bank debt as it expands did little for the EUR recovery. The news has yet to be verified and such discussions are likely to be in the early stages. However, if this is confirmed then this would prove positive for the EUR. Headline risk aside, the EUR can continue to recover on the crosses, though we believe that the move in USD crosses will dominate as QE3 becomes the principal driver of FX markets. Fed President Evans, an uber-dove, is scheduled to speak today and reaffirm the Fed’s commitment to open-ended QE.
– Fed’s Plosser critices QE3 but Benanke and the voting FOMC members are more important
Philadelphia Fed President Charles Plosser said on Tuesday that he opposed the Fed’s decision to embark on an openended program of asset purchases. He added “I believe that increasing monetary policy accommodation is neither appropriate nor likely to be effective in the current environment.” It is clear that Plosser is not a voting member on the policysetting Federal Open Market Committee this year. The comments from Plosser are at odds with the majority of FOMC voters and specifically those of the Fed Chairman Bernanke who believes that further QE is the key monetary policy response to weak growth and waning marked confidence. Accordingly, we would downplay the importance of Plosser’s comments and instead focus on those of voting members and in particular those of the Fed chairman. Still, US equities closed down last night in New York – a factor that is usually consistent with USD strength and weakness in commodity currencies (see chart). Once again, we stress that USD strength represents a selling opportunity.
– China monetary policy and data remain crucial for AUD
The PBoC announced measures to improve liquidity conditions ahead of quarter-end and the Golden Week holiday. Also after its third quarter monetary policy meeting, the PBoC noted that China will guide steady and appropriate growth in credit, while steadily reforming its interest rates system and increasing the flexibility of its managed currencies. The focus remains on further stimulus out of China since commodity currencies, in particular, have fallen vulnerable to any disappointing news or data out of China. The China October PMI next Monday and the RBA decision on Tuesday will be important for the AUD. At the end of the week, the official PMI will be released. A recovery in the PMI to above the 50 level along with no change from the RBA could lead to a recovery in the AUD. The market is currently ascribing a strong chance (70%) of a 25bp cut at this meeting. We continue to expect AUDUSD rallying up to 1.0800 by the end of the year, but for now we favour long NZD to positioning for USD weakness.
– German CPI on the calendar for today
Today, German CPI is expected to decline for the month of September after a dramatic surge in August on the back of transport prices. Core price inflation should remain unchanged. The decline in inflation in Germany should persuade ECB officials to cut rates, which we expect in November. Any hints from ECB officials this week that rate cuts are less likely should reduce the chance that the EUR will fall on declining yield advantage, though we continue to expect the assessment of credit risk to dominate as a factor in any EUR movement. Hence, a further decline in credit risk could still continue to support the EUR, in our view.
BNP Paribas