– USDJPY to be sensitive to today’s NFP; Watch the jobless rate
Stronger US data (including the ADP and the ISM) has resulted in a risk-on reaction and the USD weakening against the higher beta commodity currencies yesterday i.e. NZD, AUD, CAD and NOK. However, in Asia, a weaker than expected PPI reading has seen AUDUSD back below the 1.0400 that was taken out yesterday. Meanwhile, the BoJ minutes were fairly dovish but were from the October 4-5 meeting, which already superseded by the recent Oct 30 BoJ action. More important for USDJPY will be today’s US non-farm payrolls report; our US economists forecast a 125K reading (in line with consensus). More important will be the unemployment rate we think and whether the sharp fall in September (8.1% to 7.8%) is reversed. A print of 8.0% or above could weigh on USDJPY. Looking forward, we would expect that event risks next week (US election, China leadership handover and ECB meeting) should see conviction remaining light. Hence we would expect a grind lower in USD at best (rather than a more forceful move) against the commodity currencies and GBP next week.
– We enter a short NZDCAD recommendation
BNP Paribas FX Strategy recommended entering a short NZDCAD recommendation yesterday from 0.8260, targeting 0.7970 with a stop at 0.0.8410. We believe the CAD appears the most susceptible to a rebound within the commodity bloc with the unwind in long position following dovish BoC commentary having run its course. At the same time, relative rate spreads, relative commodity prices, BNP Paribas STEERTM as well as technicals favour a move lower in the cross (See FX Strategy Flash: Short NZDCAD – A Commodity-Currency RV Trade – 1 November 2012). Canadian labour data will be released today (12:30 BST) and the risk is for some pullback following the strong September figures. However, this is already reflected in consensus expectations (10K in Oct vs. 52.1K in Sep) so will unlikely be a driver today.
– PMIs provide positive NOKSEK catalyst; GBP supported despite softer PMI
Both the Sweden and Norway PMIs have been weaker than expected this morning, but Sweden continues to stand out as the underperformer with PMI falling to the lowest level since 2009. This supports our view that the Riksbank will cut again in December. The slightly softer Norway PMI has not detracted from Wednesday’s slightly hawkish Norges Bank statement. Next week brings the Riksbank minutes from the meeting in which they lowered their repo rate profile and made adjustments lower to inflation and GDP. A dovish outcome should offer further support to NOKSEK; relative rates continue to flag considerable upside potential from current levels. (see chart comparing NOKSEK and 2Y swap ratio). Yesterday’s UK manufacturing PMI did not provide the bullish Sterling catalyst we were expecting. Still, GBPUSD has continued to hold in well, and the 1.6105-1.6115 region (line connecting highs of past month) are important near term.
– FX reaction to US data still mixed so far, unlike other asset classes
Since the Fed announced its decision to buy MBS as part of its QE3 back in mid-September, the USD has not reacted clearly to US data. October was a month of stronger US data (e.g. ISM on Oct 1, NFP on Oct 5 and retail sales on Oct 15). But over the month, USD was softer vs. AUD and KRW, stronger vs. JPY and flat vs. EUR. In contrast, the reaction has appeared more logical for both gold and US treasury prices both weaker following stronger data. The gold uptrend reversed on the day of the stronger October 5 NFP report, while US 5Y yields have moved some 15-20bps higher on the month. We suspect that earnings season and political events (collectively until mid-November) could be holding investors back somewhat. Aa stronger realisation that US treasury purchases are forthcoming next year should see trend USD weakness.
BNP Paribas