– Market in search of catalysts
The markets continue to trade without conviction, searching for catalysts. The catalysts are many for the modest risk-off tone seen in markets but none of them are dominating at present. They include uncertainty ahead of the earnings season, the disruption to Japanese auto production given the Japan-China dispute as well as continued uncertainty on the timing of he request of a Spanish aid package. AUDUSD has continued to hold in well above 1.0150 and we continue to maintain that any USD strength should be met with selling. We retain bearish USD recommendations against both GBP and NZD.
– Further upside to NOKSEK likely this week driven by soft Swedish releases
NOKSEK came under some pressure in the European session driven by stronger than expected Swedish industrial production data. However, with industrial orders still in contractionary territory, we would fade the strength seen in SEK today. Meanwhile, inflationary pressures in Norway continue to remain intact, with underlying CPI stronger than expected in September. We think that the potentially weak CPI print from Sweden on Thursday could be important for NOKSEK. Our economists look for the Sweden headline annual inflation rate to fall to 0.4%, below the consensus expectation of a fall to 0.6% from 0.7%. This should cause further building of expectations of another 25bp cut by the Riksbank before year-end. We therefore expect that NOKSEK can continue to move higher over the days ahead. Although the cross has rallied 2% over the past week, it continues to trade slightly below where NOK-SEK interest rate differentials suggest the cross should be trading.
– Eurozone Finance Ministers to concludes with positive tones, but no major catalysts for the market
The announcements and headlines from the Eurozone Finance Ministers two-day meeting have been positive. The next disbursement of funds to Portugal has been approved, and headlines have suggested a positive outcome to the Troika’s review on Greece. As expected, while there were positive tones on Spain, there was no talk about the Spanish Government seeking financial aid at the event. Our economists expect that PM Rajoy is likely to wait until after regional elections on 21 October before seeking assistance. This would provide a narrow window of around one week for Spain to seek assistance, given that bond redemptions are due on 29 and 31 October. We view that FX investors will continue to trade the range in EURUSD and that the 200-dma at 1.2823 is likely to provide the cross with support following its recent decline.
– Recent GBPUSD dip to be short-lived; we favour long GBPUSD
Tuesday’s UK manufacturing production release came in weaker than expected (-1.1% m/m vs. -0.7% m/m), but should be kept in context of the prior month’s abnormally strong reading (+3.1% m/m). Looking ahead, our economists believe that UK Q3 GDP (due October 25) will rebound (+0.7% q/q), breaking the trend of multiple quarters of negative growth. This should highlight the relative economic out performance of the UK vis-à-vis the euro area, and hence we continue to think that a long GBPUSD position may be better than a long EURUSD position (See Pulling the Trigger on Long GBPUSD, FX Weekly, 04 October). Last week we added to our short USD recommendations with a long cable trade targeting a move to 1.6800.
– Taxes on Swiss deposits unlikely to impact CHF
Reports that custodial banks have begun charging depositors to hold Danish Kroner and Swiss Franc has created some excitement for EURCHF on Tuesday. This is not new with other banks having put similar charges in place earlier. Such soft capital controls did little to affect FX rates in the past, with the Swiss experience of the 1970’s a case in point. However, we continue to feel the ongoing easing in euro area stress will continue to see the EURCHF fair value trade higher, and continue to hold a long EURCHF recommendation from 1.2060 (established Sep 6) targeting 1.2500 multi-month.
BNP Paribas