– EURUSD still constructive, but could consolidate towards the weekend
Risk-sentiment has continued to move higher in Asia helped by better US earnings reports and a decision by Moody’s to affirm Spain’s investment grade rating (the lowest at Baa3 with a negative outlook last night on account of the proactive ECB response via the unveiling of the OMT (bond buying) framework, EURUSD has rallied 1.5 figures over the past two sessions momentarily breaching the 1.3100 level in the Asian session. We recall last week (Wednesday Oct 10) how after an initial set back, EURUSD rallied a day following S&P’s downgrade of Spain (two notches to BBB-with negative outlook). Thus, the EUR has continued to rally on negative as well as positive news catalysts, which suggests that underlying positive sentiment must be strengthening, something our analysis of the flow of funds picture has indicated to us (See last week’s FX Weekly: More evidence of shifting EUR sentiment). However, given the upcoming EU Summit (starting tomorrow), we wouldn’t be surprised to see EURUSD consolidation here, while EURGBP is looking overstretched at these levels and prone to downside on potentially more hawkish BoE minutes to be released today (more below). Our economists now view that a request for aid is likely to be between late October to mid-November, with the Eurogroup meeting on 12 November potentially an important date to watch.
– GBP could receive boost from less dovish BoE minutes today
GBP has been a slave to the EUR, with both EURUSD and EURGBP are now trading at the top of their recent ranges. While we look for EURUSD to reach 1.35 by year-end, current spot location makes short EURGBP an attractive proposition once again. Today, the UK dominates the calendar with labour data (unemployment rate expected flat at 4.8%) and BoE minutes. Our economists along with the market expect the BoE to expand QE when it meets in November, but we think the risk today is for the BoE minutes to come out a little hawkish (or less dovish). On the issue of a rate cut, BoE members have been noticeably quiet recently and we would expect today’s minutes to be light on the discussion of a rate cut. However, a number of BoE members, like Martin Weale, chief economist Dale and Broadbent have suggested that they remain more opposed to QE near term, especially in light of projected rebound in Q3 economic data. Hence, the GBP could receive a boost today. We continue to like GBPUSD higher, sticking with our trade recommendation from 1.6140 targetting 1.6800 multi-month.
– Political pressure on BoJ easing to intensify
A Kyodo report yesterday evening stated that PM Noda has instructed his cabinet to craft new measures to curb deflation, JPY appreciation and expand quake reconstruction work by November-end. Our economists expect political pressure on the BoJ to increase in the weeks ahead (See Japan: Political heat for monetary easing to intensify, Macro Matters, 4 October) with PM Noda handicapped to undertake fiscal easing given the inability so far to pass the deficit financing bill. While we see the threat of intervention as remaining low given current market conditions (See JPY: Low threat of intervention, FX Weekly), we wouldn’t be surprised to see expectations of monetary policy easing increase heading towards the October 30 BoJ meeting, which comes just a few days before the G20 meeting in Mexico (November 4/5). The BoJ minutes and Governor Shirakawa’s speech (both Oct 22) will be the next events in focus.
– TICs data indicates that US inflows dominated by safe-haven, not growth-seeking flows
Yesterday’s August TIC data release continues to suggest that the bulk of US-directed inflows remained defensive, and not growth-seeking. Inflows were stronger than expected, but Treasury and Agency bond continue to make up a majority of the inflows, equity related inflows remain low. This investor behaviour indicates much potential for the extra liquidity provided by the Fed’s QE3 is likely to cause investors to place risk-on positions outside of the US and cause the USD to weaken.
BNP Paribas