– We re-establish USD shorts ahead of key events
With US markets closed overnight for Thanksgiving and Japanese markets closed today, expect a range bound market. Carry looks to be the dominant near-term theme. We entered a long AUDUSD recommendation at 1.0390 yesterday, targeting a rise to the 2012 high of 1.0850, with a stop at 1.0150. This position re-establishes USD shorts ahead of key US events over the weeks ahead. We look for a combination of Fed easing on December 12 and a resolution to the fiscal cliff to spur risk-appetite, causing the USD to weaken. Meanwhile, the prospects for the AUD look bright with a recent improvement in the outlook for China. An improving outlook for the Asia region is likely to support inflow into the AUD – our China economists expect USDCNY to reach 6.00 next year and the AUDUSD is likely to benefit from this. Our FX Positioning analysis shows that investors are currently holding neutral AUD positioning and our STEER model suggests that AUDUSD is slightly cheap, providing scope the AUD to rally. In addition, a potential RBA rate cut on 4 December is unlikely to hurt the AUDUSD significantly as the rates market has fully priced in a cut for the next two RBA meetings. Instead, the risk appears to be on the upside for AUDUSD should RBA keep rates unchanged. Please refer to “Long AUDUSD: Re-establishing USD shorts” in the latest Global FX Plus (FX Weekly) for further details.
– CAD’s underperformance may persist today, but is likely to soon reverse
The CAD underperformed both the USD and its commodity currency peers yesterday following softer-than-expected retail sales data. Total retail sales grew by only 0.1% in September while ex-auto sales were flat m/m (+0.5% expected for both measures). Today’s CPI data is unlikely to be able to turn around the CAD’s very short term prospects – our economist’s expect a soft headline CPI release with annual inflation declining to 0.9% from 1.2% (1.1% expected). However, we expect beyond the days ahead for the CAD to outperform the NZD and remain on par against the AUD, while as a bloc we expect commodity currencies should strengthen against the USD substantially. Inflation may continue to decline in Canada, but a focus of the BoC is currently the threat of rising household debt. Our economists view that these concerns will cause the BoC to hike rates three times in 2013, which would provide substantial support to CAD. We still like short NZDCAD targeting 0.7970 as relative interest rate differentials and commodity prices signal that the cross remains vulnerable to moving lower. Economic data from New Zealand is likely to remain soft while we expect the CAD, in addition to the AUD, to benefit from a resolution of the US fiscal cliff.
– EUR to remain supported despite weak eurozone economic picture
Today, we expect Germany’s IFO survey to be mixed but is unlikely to be a major driver for FX. We view that expectations of further Fed easing in December and positive impact of progress on a decision for Greek funding and debt sustainability are likely remain the significant drivers. Recent comments by Germany’s Finance Minister Schaeuble suggested that there were only “technical questions” to be solved while EU president Junker also said there were “no major political disagreements”. Eurozone finance ministers are set to reconvene on November 26 where we expect progress is likely to be made on Greece. Accordingly, we view that EURUSD will continue to remain supported with a 1.33 year-end target.
BNP Paribas