– AUD rallies with rebounding China sentiment eclipsing RBA easing expectations
The stronger batch of activity data out of China this morning should help negate the bearish AUD view brought on by the unexpected Oct 2 RBA cut. Higher frequency FAI, retail sales and industrial production all above consensus estimates, while the q/q GDP rebound was the strongest in a year. This adds to the improving China-related sentiment we pointed out earlier this week with the Hang Seng China Enterprises Index having already broken out to a 5-month high. That gauge this morning has broken higher still, and this should provide a strong positive catalyst for AUDUSD, counteracting still present RBA easing expectations. Note here that the market has struggled to price in further RBA easing over the past week, with Aussie bank bill futures having sold off to levels seen before the RBA decision. Following the sharp 1 figure plus rally yesterday, AUDUSD is consolidating just under its 55-day moving average (now 1.0391), but we would expect spot to build further on gains into next week. Meanwhile, EURUSD closed above the 1.3100 overnight and continues to remain supported, though with the upcoming EU Summit (starting today) some consolidation should be seen here.
– SEK strength to Riksbank speech to be short-lived
The SEK was the outperformer this morning with strength linked to a relatively hawkish sounding opinion piece from Riksbank Governor Ingves defending criticism for not lower rates further. While this could see the odd 10bps of easing for the October meeting decline, it may not have as much a bearing on the call for another rate cut which our economists project at the December meeting. They point out that the tone of the article was very much longer term in nature (similar to BoC Governor Carney’s speech earlier this week). Accordingly, any SEK strength would be tactical, and we continue to maintain a bearish stance on SEK against both the EUR and NOK. The BNP Paribas STEER™ fair-value model yesterday triggered a long NOKSEK recommendation at 1.1675, targeting a move to an implied fair-value of 1.1940, stop at 1.1535 (See FX Strategy Flash: RV Trade Long NOKSEK – 17 October). Our own discretionary bias has remained consistently bullish NOKSEK since August (See Reiterating Long NOKSEK: Opportunity Knocks Twice, FX Weekly, 13 September).
– Risk of month-end disappointment short-JPY positions
The one month high of 79.05 in USDJPY reached on Wednesday was triggered by a Nikkei article suggesting that the BoJ may come under more pressure to ease policy at the end of October. This follows from reports earlier in the week that PM Noda may instruct his cabinet to craft new measures by November-end. Our economists believe political pressure on the BoJ to ease will increase in the weeks ahead with PM Noda handicapped on fiscal easing. We see the threat of intervention as remaining low given current market conditions (See JPY: Low threat of intervention, FX Weekly), but speculation of monetary policy easing could increase heading towards the October 30 CB meet, a few days before the G20 meeting (Nov 4/5). However, if the BoJ deliver only another JPY5-10tr this may disappoint the market as back in mid-September when USDJPY rallied to 79.20. The next key events will be Oct 22 BoJ minutes and Governor Shirakawa’s speech (both Oct 22).
– GBP further boosted by strong retail sales; we favour long GBPUSD
Following yesterday’s less dovish MPC minutes, Sterling received further support today from stronger September retail sales, which plays to the view that Q4 has gotten off to a strong start. The next focal point will be UK Q3 GDP report next week which our economists expect to rebound. Both should prove positive for Sterling, and we stick with our existing trade recommendation from 1.6140 targeting 1.6800 multi-month. On policy, our UK economist still thinks the bias is for more QE in November with the majority of internal BoE members still of the view that more is required (not less) after the projected GBP 375bn target is expected to be hit at the end of October. However, he points out that the November meeting is likely to be a fractious affair, but believes it is unlikely to be unanimous.
BNP Paribas