– Markets hold in well despite plenty of negative catalysts
Markets continue to hold in well. The catalysts for risk-off are plenty, including earnings season uncertainty, Japan-China tensions and trade disruption, uncertainty on when Spain requests assistance (and yesterday’s S&P downgrade) and geopolitical tensions surrounding Turkey, Syria and Iran. But despite the above, markets have continued to hold up quite well with equities in Europe and US overnight less than 1.00% lower, and Asia holding in even better today. We have found that often “risk-on” in the rates markets has front-run any rally in equities. The continued tightening in US swap spreads suggests a combination of expectations of easy monetary policy and/or declining safe haven bid which should support risk appetite (See chart comparing 5Y swap spread with the SPX). Yesterday’s Fed Beige book signalling modest wage pressures and little change to employment conditions has done little to change this assessment. We remain cautiously constructive on risk-appetite further out and maintain that any USD strength provides opportunities to sell into. We retain bearish USD recommendations against both GBP and NZD.
– AUD outperforms on stronger headline jobs data; Higher jobless rate suggests RBA easing intact
AUD was the out performer in the Asian session following a stronger headline jobs report (14.5K vs. 5K consensus) with a strong gain seen in full-time employment. The reaction has been AUD strength across the board, with the currency making gains against the USD, NZD and CAD. However, while the AUD could continue to gain, the higher than expected gain in the jobless rate (5.4% up from 5.1%, highest since Q2-2010) might be more relevant to the RBA policy outlook. RBA officials (like Deputy Governor Lowe) have pointed out that the low jobless rate may over state the strength of the labour market (due to lower participation rates and a higher underemployment rate) and the higher jobless rate validates the RBA’s more dovish turn on the labour market in last week’s statement. Our economists continue to expect a rate cut at the November 7 RBA meeting, with pricing now fairly static (Nov 7 OIS 3.06% vs. 3.05% last week, and 3.25% cash rate). This should see AUD eventually weaken on crosses like AUDCAD and AUDNZD. But we continue to believe AUDUSD can continue to grind higher on broader based USD weakness.
– Further upside to NOKSEK likely; Weak Swedish CPI today to help
NOKSEK continues to look constructive in our view and we continue to expect the cross to trade above the 1.1700 handle. 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. This comes against data yesterday showing that underlying inflationary pressures in Norway – while moderating slightly- continue to remain intact (underlying CPI stronger than expected). 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 higher.
– ECB focus on OMT vis-à-vis rate cut should see EUR continue to recover
Comments from ECB Noyer continued to suggest that the preference for the central bank remains on bond purchases (OMTs) to ensure the effective transmission of monetary policy, as opposed to a rate cut. Hence, our focus continues to remain on the assessment of the credit markets and today’s CPI data are likely to be a sideshow for FX. Here our EMU sovereign-CDS measure continues to suggest that the bias for EUR crosses remains for a consolidation with a positive bias. Given our expectation for USD weakness on QE, we think the multi-week EURUSD bias continues to remain constructive with spot managing to hold in well above the 200-dma (1.2823).
BNP Paribas