– EURUSD, GBPUSD and NZDUSD remains biased higher
Markets have continued to charge ahead with better earnings reports from Europe and Thursday’s stronger labour data from the US showing initial jobless claims falling sharply. The markets now appear positively correlated to US data releases, rising when data outperforms. 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. EURUSD is also trading positively having hit technical support at its 200 day moving average, currently at 1.2822. Given our macro outlook, this level represents an attractive riskreward for entry to a positive EURUSD exposure. We continue to forecast 1.3500 by yearend.
– Next week’s US economic data should come out on the weak side
Given the open-ended nature of QE3 and the significant conditionality regards economic improvement, we believe that US data releases will play a strong role for the USD. Our view is that US economic weakness will be viewed as more likely to invoke stronger QE3 that will be USD negative. BNP Paribas’ US data forecasts for next week indicate that downside surprises are the most likely outcome for most releases. 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 would be USD bearish.
– 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. 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.
– 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