– Central banks in the spotlight this week; further AUD gains ahead
Central bank meetings – RBA, ECB, BOE and BOC — are in the spotlight this week. Of focus tomorrow, the RBA policy announcement will offer some opportunities for AUD. Weaker local economic data, including today’s retail sales and operating profits has seen the pricing of a 25bps rate cut tomorrow pick up now at 88% odds. A rate cut could result in a knee-jerk AUDUSD selling reaction, but given that the cut is largely priced in, downside should be fairly limited and be viewed as a buying opportunity. The bigger risk would be an unchanged decision which would be very positive for AUD. Aside the RBA, other factors remain supportive of AUD gains. These include a looming expansion to the Fed’s QE3 and an improved growth outlook China evident from the rebound in the November Chinese official (to 50.6 from 50.2 in Oct) and HSBC flash manufacturing PMI (to 50.5 from 49.5 in Oct) prints. A resumption of lower USDCNY fixings would clearly be bullish AUD and our expectation for CNY appreciation (6.02 end-2013) remains a key input to our bullish AUD view. We maintain an AUDUSD long trade recommendation entered at 1.0390, targeting a gain to 1.0850.
– NFP to distract from watching the fiscal-cliff talks, USD is still a sell
Friday’s November non-farm payrolls report should a least for a time shift the market’s focus away from the fiscal cliff and to the Fed outlook. The hurricane Sandy’s impact was already evident in the recent jump in jobless claims and we expect November payrolls to show a meagre 25K gain, which is some way below the current consensus expectations for a 90K increase. Even accounting for the weather impact, it is clear that the Fed continues to see the progress on employment as disappointing. A soft November number would support our call for a shift to outright Fed Treasury purchases at the December meeting, which is yet to be fully reflected in the FX markets, in our view. Our overall approach remains bearish on the USD as we prefer to ‘fade the cliff and play the Fed’ ahead of the December 12 FOMC meeting.
– Data continue to support long NOKSEK
Swedish PMI for November disappointed market expectations (43.2 vs. 44 consensus) coming flat on the month. In contrast, the Norway PMI came in stronger in November (50.1 vs. 48.8) with October revised higher while credit growth continues to remain robust in October. Our economists continue to think that a 25bps rate cut appears highly likely when the Riksbank meet on December 18. With this only about 50% priced in, we would expect SEK to under perform both the EUR and NOK. NOKSEK has continued to remain in an uptrend defined by the upward channel (1.16180-1.1990) in play since August. We stay with our long NOKSEK recommendation targeting 1.1940.
– Watch ECB and Eurogroup meetings, and the progress on Greek debt buyback; stay long EURCHF
The EUR continues to remain relentless bid with risk-premia continuing to compress; EURUSD is above 1.3000 and 10Y Spanish yields have continued to decline nearing last week’s 5.20% low. The focus this week will be on the Eurogroup meetings and Thursday’s ECB meeting. The Eurogroup meeting kicks off today, followed by an EU finance ministers meeting tomorrow. The focus will be on finalizing any further details on the Greek agreement, discuss whether Portugal and Ireland would get same concessions and to discuss the Cypriot rescue program. More details of the Greek Debt Buyback scheme were released today with offer to end December 7. The process itself will finish December 13 with the Troika to deliberate on its success, or not, on December 10. Our view remains that Greek will receive its December tranche of loan, which will keep the EUR supported. On Thursday, the ECB should leave policy unchanged with an economic assessment similar to the one from the November meeting. The new staff projections should reinforce the message of a gradual recovery. A restatement of OMT should reinforce the more positive euro zone tone.
BNP Paribas