– ECB hurt EUR-crosses and EURUSD; but we expect a bounce-back in EURUSD by year-end on a dovish Fed
The ECB left its Refi rate unchanged at 0.75% yesterday, as expected, but President Mario Draghi’s dovish comments at the press-conference triggered a broad EUR sell-off. Notably, the ECB slashed its 2013 GDP growth forecast from 0.5% to -0.3% (close to our economists’ forecast of -0.4%). The CPI projection was also revised down, to 1.6% from 1.9%. However the main trigger for the sharply negative EUR reaction was the mention of a “wide” discussion over rate cuts, and Mr. Draghi also said the ECB was “operationally ready” for negative rates. The forward EONIA rate dipped into negative territory on those comments and EURUSD fell from around 1.3070 to lows of 1.2950. Although it is clear that the probability of an ECB rate cut has increased, our economists maintain the view that the ECB is operationally ready but not under great urgency to do so. Moreover, we suspect the EUR’s main sensitivity will remain towards eurozone bond market stress. Despite some recent jitters surrounding the political situation in Italy (we believe the Mario Monti government is unlikely to fall for the time being), the underlying theme of the past several weeks has been the steady reduction of the eurozone risk premia. While a soft Eurozone growth outlook suggests EUR will under perform other G10 currencies (in particular against the AUD, CAD, GBP) we see the EURUSD pullback as temporary. Next week’s Fed policy announcement should be the trigger for a EURUSD bounce back and we continue to target 1.33 by year-end.
– Stay long AUD into US payrolls, Watch Chinese monthly economic data due next week
The US November non-farm payrolls report is likely to be the main FX market catalyst today. Despite a relatively robust reading on the ADP private sector employment, our economists stick with a below-consensus 25K forecast, largely accounted for by a 152K impact on jobless claims from hurricane Sandy. We also note that the employment component of both the November manufacturing and services ISM reports fell, which is a negative sign for payrolls data. The data are of psychological importance ahead of next week’s FOMC announcement. We believe the Fed will roll the expiring Operation Twist into outright Treasury purchases of USD 45bn per month, bringing the total net balance sheet expansion to USD 85bn per month. Our preferred way of positioning for this shift is through our long AUDUSD recommendation targeting 1.0850 (entered at 1.0390). The AUD has traded very positively this week despite the RBA rate cut, with the better than expected November employment data supporting our economists’ view that the easing cycle is over. Aussie trade deficit widened to AUD 2.088bn (s.a) in October from a revised AUD 1.42bn prior, but beat market expectations a larger deficit of AUD 2.20bn. Watch Chinese monthly data due on 9-15 Dec; out-performance in the Chinese data will sustain AUD gains.
– CAD outlook positive on BoC
CAD has shown some notable resilience despite a surprisingly soft November Ivey PMI reading which fell to 47.5. This series tends to be volatile however, and we would treat one month’s data with a grain of salt. On a more positive note the October building permits jumped by 15% m/m. The strength in housing data echoed the Bank of Canada financial stability review which highlighted the familiar themes of excessive household leverage and an uncertain housing market outlook. In our view, the overall tone is consistent with the current Bank of Canada stance that policy rates should start being normalized in the not too distant future. Our economists maintain the call for the BoC tightening cycle to start in the second half of 2013, which should provide some key support for CAD. On Friday, we are looking for an above-consensus 15K increase in Canadian November employment, which should add to the near-term positive sentiment. We continue to forecast a USDCAD rate of 0.92 by Q3 of next year.
BNP Paribas