– Progress on Greece should be positive for EUR this week
We view that the slight rebound in risk appetite at the start of the week can continue to gain traction as progress is made by policymakers to reduce fiscal risk in Europe and the US. In Europe, Greece should be in the spotlight early this week as the Eurozone finance ministers convene at a special meeting on Tuesday. After much can-kicking in recent weeks, substantial progress would be critical for market sentiment. IMF officials have recently reiterated their position that Greek debt should fall to 120% of GDP by 2020. With a haircut on official loans strongly opposed by Germany, there is speculation that Greece may buy back debt using privatization assets as collateral or a loan from the ESM. Despite these uncertainties, we believe there is a broader understanding that a solution will be reached and we are positive that Greece will receive financing by the end of the month. In contrast, Eurozone data should maintain a very subdued tone. We expect only a marginal increase in the November Eurozone ‘flash’ manufacturing PMI to 45.6 and a more sizeable drop in the services PMI to 45.5. We also see Germany’s IFO business confidence index deteriorating further to 99.5 as the economy heads towards a contraction in Q4. Despite these persistently soft economic activity readings, we still expect a resolution to the Greek uncertainty to offer support to risk and the EUR over the coming week.
– A compromise on the US fiscal cliff to drive a weaker USD
The USD owes much of its post-election resilience to the ongoing fiscal cliff fears – we expect that these fears to fade over the coming weeks and for the USD to weaken. The signs from the first round of talks on Friday were mildly encouraging as House Speaker John Boehner described Friday’s talks as “constructive”. Timing remains critical, and our best-case scenario is for a deal to be reached by early December. The fading of the fiscal cliff concerns is likely a necessary but not a sufficient condition for the risk recovery. For USD downtrend to re-establish itself, we believe the Fed will need to deliver in December. The events of the past week support and reinforce the view that the Fed is heading for QE3-Plus. In particular, we note recent comments by SF Fed President Williams who explicitly mentioned the USD 85 Bn figure for monthly Fed bond purchases starting in early 2013. Late on Friday, Atlanta Fed President Lockhart also joined the dovish chorus, suggesting that “aggressive” monetary easing was needed to spur job growth even if Congress addresses the fiscal cliff issues. There is little to change the Fed view over the coming week, where we expect declines in both October housing starts and new home sales (data were collected before hurricane Sandy). Fed Chairman Bernanke should maintain a dovish tone during his remarks on Tuesday.
– IMM data shows USD shorts falling further
IMM speculative positioning data through November 13 showed net USD shorts falling further, consistent with the FX price action after the US elections. EUR net shorts rose somewhat to 83.6K contracts, the largest short position since early September but only 40% of the shorts exposure seen in late May. JPY shorts fell slightly to 30.4K contracts while traders also scaled back on their long GBP exposure. AUD longs rose to 68K but subsequent price action late in the week suggests that this increase has probably been reversed. Speculators continued to gradually reduce their net long CAD positions, while NZD positioning has remained relatively stable during the week. With IMM and our own positioning indicator suggesting an unwind in USD shorts, we believe the market is well positioned to react to what we expect to be positive news on Greece, the US fiscal cliff and the Fed’s QE3 late in the year. Our FX forecasts continue to see USD weakening against other G10 currencies by year-end.
BNP Paribas