– Our CDS-measure turns higher, flagging a bullish EUR stance even at current levels
Markets today are not looking as risk-constructive as they were yesterday, but it can safely be said that it has nothing to do with eurozone concerns. If anything, financials continue to outperform (the only sector up today in eurostoxx) while Spain’s IBEX index is the only stock market in the green today. Accordingly, in FX it is no surprise that the EUR continues to remain bid against all G10 currencies (except NZD). Our focus continues to remain on the assessment of the credit markets and here our EMU sovereign-CDS measure has flagged consolidation for EUR crosses with a positive bias. Indeed, if anything, sovereign risk premia is declining further even following from yesterday’s S&P downgrade of Spain, continuing to favour the topside on EUR even at these levels. EURUSD is also trading positively having hit technical support at its 200 day moving average (now 1.2825) now eyeing the 1.3000 level. Given our macro outlook, we believe that risk-reward continues to favour positive EURUSD exposure. We continue to forecast 1.3500 by year-end. Earlier today, Singapore’s Central Bank (MAS) did not loosen policy dashing widely held expectations, and prompting a downside USD/Asia move.
– Next week’s US economic data should come out on the weak side
The markets now appear positively correlated to US data releases, rising when data outperforms, also seen following yesterday’s jobless claims data. This appears to reflect the view that the Fed will continue with open-ended QE irrespective of tactical outturns in data. We remain committed to our short USD view and we maintain long GBPUSD and NZDUSD trade recommendations – in each instance targeting new yearly highs. We have made below market estimates on the Empire State manufacturing survey and retail sales (Monday), industrial production (Tuesday), Philadelphia Fed survey (Wednesday) and existing home sales (Friday). If we are correct on these calls, we would forecast that the associated increase in expectations for QE should be USD bearish, though we will continue to highlight the reaction function of markets to US data releases.
– Spain is unlikely to apply for assistance next week ahead of regional elections on October 21
In the eurozone, markets continue to focus on whether Spain will ask the ECB for funding assistance. We believe that such a request is inevitable but that the timing is the only uncertainty. The regional elections to be held in Galicia next weekend (October 21) may be a watershed event that Prime Minister Rajoy may want behind him before seeking ECB assistance. Accordingly, next week may not provide a EUR-positive catalyst that such an event would bring. Instead, the following week may be the most likely timing for an announcement. 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.
– We like NOKSEK higher and AUDNZD lower
Away from the majors, our two favourite FX cross trades remain long NOKSEK and short AUDNZD. NOKSEK has now achieved our long standing target of 1.1700 further helped by yesterday’s weaker Swedish CPI. NOKSEK continues to look constructive in our view and we continue to expect the cross to trade higher from hereon driven by (a) relative central bank policy outlook and (b) declining demand for SEK assets. AUDNZD progressed lower towards our 1.2300 target though there has been some retracement following the stronger jobs data from Australia yesterday. However with the higher jobless rate likely to keep RBA easing expectations intact, AUDNZD should be biased lower on relative rate expectations. From New Zealand, the Q3 CPI report (Oct 15) will be the next key domestic input ahead of the RBNZ meeting (Oct 24). The market continues to price in 20bps of easing on a 1Y view which seems unrealistic.
BNP Paribas