– Risk-on likely undeterred by Spanish bank review this evening ; Look to add to short USD
The long-awaited Spanish budget has been well received by markets with Spanish sovereign spreads relative to Germany narrowing and global equities finishing higher. Today, the event will be the bottom-up banking sector review due out later this evening (17:00 BST), though potential results (circa EUR 60bn in line with top-down review in June) is pretty well flagged and hence should not present much FX event-risk. While the USD has generally weakened during the Asian session, high beta and commodity currencies were the biggest winners on the day against the USD with our favoured currency NZDUSD taking out the recent high at 0.8354, achieving the highest level since early March. Recall that it was in March when the post-LTRO market euphoria was brutally unwound following Spanish troubles, with Spain unilaterally deciding to raise budget deficit targets. So in select currency crosses, we have clearly overcome (price-action wise) the risk-off period which began then. We believe that the market environment will remain pro risk-on and USD bearish as a result. While Spanish event risk (with actual reforms still to be decided) could present headline-risk, the market reaction function has clearly shifted. Why? Back in March (when Spain sparked risk-off), there was no sense of policy-coordination within the EMU. That was “less Europe”. We have since Q2, following the “Draghi put” now moved towards “more Europe”. This shift, along with the market still pricing in open-ended QE (see nasty US data below) leaves us looking to add short USD-exposure on any USD firmness. We maintain our conditional GBPUSD long (proposed entry 1.6000).
– Stay EUR constructive with falling stress to trump declining EUR yield
After much anticipation over the Spanish budget, the announcement came in line with expectations, but the details were rather skimpy. The outline to the structural reforms was delivered, but the details have yet to be announced. No time line has been provided for this, but must be announced before 8 October to be reviewed by Ecofin. Also worth noting, investors who were concerned that Spain may not ask for external support will not take comfort in the transfer of EUR 3bn from the social security fund to cover liquidity needs. The budget represents two steps forward and one step back, which is why the EUR only moved slightly higher. The EUR should find support from key political events in the month of October, including the Ecofin meeting, EU Summit, Spanish regional elections and the eventual request for support. Ahead of that, comments from ECB members Asmussen and Godeffroy today will be important. We maintain our long held 1.3500 year-end EURUSD target.
– US data reinforces Fed’s aggressive easing stance
US data on Thursday significantly disappointed and bolsters the Fed’s decision to pursue aggressive policy stimulus. Total durable goods collapsed 13.2%m/m in August. Also, Q2 GDP was unexpectedly revised down to 1.3% q/q saar from 1.7% in the third estimate. The weakness was broad-based. Our economists expect growth to remain well below trend through the second half of 2012 and pick up in 2013, as the Fed’s policy easing takes effect. Today’s US personal spending and income for the month of August is forecast to come in weaker than the previous month as is the University of Michigan consumer Sentiment for September. Thus, we remain bearish on the USD; our favoured short USD trade is long NZDUSD.
– Contrasting Norway vs. Sweden retail sales; Stay NOKSEK constructive
The stark contrast between strength in Norwegian data relative to its’ Swedish counterpart (seen in today’s retail sales data for both) suggests interest rate differentials should continue to move in favour of a higher NOKSEK. Unfortunately, our long NOKSEK recommendation (from 1.1310 on 9 August) triggered the 1.1400 take-profit level last week, but clearly our view remains that the cross faces further upside on a multi-month view (See Reiterating Long NOKSEK: Opportunity Knocks Twice, FX Weekly, 13 September).
BNP Paribas