– The RBA left policy unchanged, AUDUSD breaks above 1.0400
The RBA remained on hold referencing slightly higher-than-expected inflation and some improvement in global conditions. It sees growth around trend over the past year and expects resources investment to peak next year. However, recent data shows investment is likely to contract in the near term, leading domestic demand to stagnate in H2’12, and significant European risks remain. Our economists expect a 25bp rate cut at the December meeting. AUDUSD has rallied in response following the steady rates and more hawkish statement finally breaking above the 1.04 level that had capped the currency pair for all of October. The move is consistent with our own FX views – we target 1.08 by the end of 2012. Risks of further RBA rate cuts during 2013 may come back to haunt AUD but for now the upside beckons.
– Focus on the US election …but the USD is still likely to weaken on either candidate
Our bearish USD view through end 2012 and for all of 2013 is premised on the assumption that US President Barack Obama is re-elected, the Republicans retain a majority in the House and no party has a 60-vote majority in the Senate. Still, the recent closeness of the polls suggests that we may need to consider the implications of a different outcome, specifically, the case of Mitt Romney winning the presidency. Many in the markets fear that a Romney presidential victory would result in a significantly more hawkish Federal Reserve, potentially ending QE3. We do not think such an aggressive change is likely. Chairman Ben Bernanke’s term expires in January 2014. The removal of a sitting chairman is close to impossible, and with all the other challenges facing a new President, it would appear unlikely that Romney would attempt such a thing. Accordingly, Mr Bernanke would be likely to serve his full term. Furthermore, our US economists believe that the Fed would be nearing the end of its asset-purchase programme by then. Looking at the impact on the USD, Mr Bernanke’s strong precommitment to Fed balance-sheet expansion is set to remain in place as the key USD driver. Markets may wind back expectations on the amount of Fed balance-sheet expansion, but such diminished expectations may ultimately prove incorrect
– USDJPY increasingly at risk of reversing lower
Our own BNP Paribas positioning analysis shows that investors’ bearish JPY positioning continues to increase and positioning is now starting to approach extreme levels (see chart). Short JPY is almost as extreme as in March of this year when USDJPY’s rally ran out of momentum at 84. Our analysis suggests that the JPY is increasingly susceptible to a short squeeze. This risk from positioning arises as our US-Japan 2-year yield spread now signals that the pair should move lower. The driver of the lower yield spread is the fall in US 2-year Treasury yields that peaked in the second half of October but have reversed since. Given the expectations for strong and aggressive Fed QE3, we have stressed that the rise in US short yields was not sustainable. Such a view is consistent with our broad call for USD depreciation. We initiated a short USDJPY recommendation last week targeting 77.00 with a stop at 80.70.
– UK data disappoints…but all is not lost for GBP
UK industrial production was weak in September, though largely for reasons connected with maintenance at gas and oil installations. The level of industrial production fell 1.7% on the month in September, taking the year-on-year rate down to 2.6%. Those on the MPC arguing for an extension of QE at Thursday’s meeting have a number of arguments on their side, but we doubt they will be quite sufficient to convince a majority to vote for more asset purchases this month. We continue to stress that quarters of negative growth are behind us in the UK while the eurozone is now set to add two more quarters of negative growth in addition to the one already reported. We are bullish GBP against both EUR and USD.
BNP Paribas