– EURUSD decline to be temporary; Weak US GDP to result in weak USD
Today’s European PMIs and German IFO came in softer, resulting in some EUR weakness. A multi-day decline in EURUSD would not surprise us with periodic bouts of USD support should the earnings season-which not even halfway throughdisappoint (more below). But the EUR bid should be more durable and linked to an improving capital flows picture which stronger than just a short-squeeze seen in recent months. We would consider the 200-day moving average (now 1.2835) to be the key pivot point. Today’s FOMC event is likely to be a non-event following the September pledge to undertake openended QE. However, our economists look for a weaker Q3 US GDP print (Friday) forecasting a downward surprise of +0.5% q/q, almost a third below the consensus of +1.7% q/q. A softer GDP should play to the view that the Fed keeps QE3 in play for longer and should weaken the USD. We maintain our long recommendations in NZDUSD and GBPUSD.
– Upside data surprise support AUD…….AUDNZD is focus with the RBNZ tonight
The AUD climbed half of a cent this morning as a surprisingly sharp rise in domestic inflation and firmer Chinese manufacturing data prompted markets to pare expectations on the speed and scale of further rate cuts. Q3 CPI rose to 2.0% y/y from just 1.2% y/y in Q2 (expected 1.6% y/y) while the RBA’s preferred weighted median measure jumped to 2.6% y/y from 1.9%. Further positive news for AUD came in the form of a rebound in the Chinese HSBC PMI to 49.1 from 47.9. The Chinese data is crucial for AUD positive momentum and Asian currencies in general. Given our strong expectations for large QE3 from the Fed ($1.2 -1.7 trillion) through end 2013, we believe that AUDUSD will continue to trade higher (1.08 forecast by yearend) while any AUD weakness will best be expressed on the crosses such as AUDNZD. This pair has rallied overnight and remains inline with relative yield performance. While the stronger Australian data has supported this cross today, the statement from the RBNZ may support NZD if the rhetoric shifts to be more hawkish. Accordingly, AUDNZD could drop back.
– NOKSEK to move higher; Weak data and dovish Riksbank tomorrow to help
Weak Swedish manufacturing numbers for October (lowest since Oct 2009) suggests that the economy continues to remain impacted from weaker growth in the eurozone. This, combined with a dovish Riksbank statement at tomorrow’s meeting could keep expectations of a December rate cut alive and see SEK continued to remain soft. We hold onto our long NOKSEK STEER trade (established Oct 17 from 1.1675 targeting 1.1940, stop at 1.1535).
– Potential for more earnings disappointments could delay FX trends taking hold
Our pro-risk bias continues to remain intact on a multi-week view given proactive central bank actions (both Fed and ECB) to lower risk premia. Moreover, indications from different data sources are that inflows into emerging markets are picking up (HKMA intervening twice in a week) which tends to be consistent with USD weakness against G10 FX. However, risksentimet could continue to be deterred by the continued potential for earnings disappointment. In the US, we are only halfway through the earnings season; only 161/498 companies in SPX have reported so far, with earnings season to continue till mid-November. For the eurozone, there is even more to go with only 73 of 354 having reported earnings for the STOXX 600. Accordingly, results could continue to prevent trends from taking hold in FX for the next fortnight. Today’s stronger China PMI has seen a positive consolidation in the Hang Seng China Enterprises index (our preferred China sentiment indicator). Moreover, we find it constructive that the pull back in European financials (important barometer of risk generally) has been on lower volumes, following a multi-week rally on higher volumes. The underlying bias remains constructive.
BNP Paribas