– Fiscal Cliff talks pushed back to after Christmas – impasse an opportunity to add to USD shorts
FX markets entered a risk-off tone overnight with US House Speaker Boehner having delayed the vote on tax increases for high-income earners. Boehner’s announcement brings the US economy closer to going over the cliff in the New Year with talks not restarting until 27 December, thereby providing only a few days for further discussions. However, while there is nervousness from the apparent set-back in the fiscal-cliff talks, an agreement remains likely by the end of the year or soon enough in the New Year that the impact on economic activity is likely to be limited. The USD has been bid during the Asian and European sessions, although EURUSD and GBPUSD remain within their trading ranges of the week. Declines in the high-beta currencies (AUD, NZD and CAD) have been thee most significant moves. We highlight, however, that our FX Positioning Analysis suggests that that investors are currently running only light risk-on positions due to the lingering uncertainty around the cliff (see chart below). This in our view limits scope for the market to sell-off. We therefore view that a rebound in the USD over the holiday period provides an opportunity to add to USD shorts. We favour AUDUSD moving higher in the New Year and also expect the CAD and the GBP to benefit from the USD weakness.
– Solid domestic data signals further CAD gains
The CAD has sold off over the past 24hrs amid the risk-off trading environment and despite Canada’s strong retail sales release on Thursday. BNP Paribas STEER currently indicates that the CAD has been oversold and is vulnerable to a rebound. Over a multi-month horizon, Canada’s strong economic data should provide support for CAD which remains one of our preferred currencies. Canadian CPI in Friday is unlikely to be a major driver for the currency with headline inflation expected to decline to 1.1% and core to remain stable at 1.3%. Looking ahead to 2013, we believe commodity currencies will benefit from the global search for yield as well as strengthening growth trends in the emerging economies.
– EURGBP vulnerable to moving lower after some positives in UK GDP release
The headline reading of the UK’s final Q3 GDP release was revised lower with GDP expanding 0.9% q/q, down from 1%. However, the details reveal upward revisions to previous quarters through to the start of 2011. In particular, household spending in Q1 and Q2 this year were revised higher, and real income growth looks to have been stronger than previously thought. In FX, we expect that GBPUSD can remain supported as the USD remains under pressure on expectations of progress on the fiscal cliff. Meanwhile, EURGBP is close to the top of its trading range since May. Positive tone to UK data releases such as today’s GDP are likely to push EURGBP lower. The next major data release will be the PMIs in the New Year.
BNP Paribas