After S&P US Downgrade, ECB response in focus and could help EURUSD up to 1.4500.
See Market Focus on p.3 for our take on S&P’s action.
FOMC statement, China data, are other main event risks. Latter could grant a reprieve from further AUD sell-off. After S&P downgraded the US over the weekend, financial markets have continued their risk aversion move with Asian equities broadly lower and developed market equity futures signalling further significant losses. FX markets have been more restrained however – the orthodox reaction of stronger JPY, CHF and USD against weaker AUD, NZD and EM has been respected, but there is little evidence of panic. Indeed our view is that the FX implications of the S&P action are likely to be limited: the move was largely expected, and the immediate implications for the US Treasury market seem to be few. There is little to suggest any forced selling on the back of the downgrade; and there are few alternatives for the reserve managers of the world, even if China has taken the opportunity to express its displeasure with the US’ fiscal laxity. As yet there are no indications that Treasurys will be subject to increased haircuts as collateral.
Indeed the larger story for today is likely to be the Eurozone bond markets, specifically the impact of ECB buying of Italian and Spanish bonds. After the Italian governent announced that it would accelerate plans to balance its budget, the ECB Governing Council met yesterday and said that it would ‘actively implement’ the Securities Market Programme of bond-buying. While there was no specific mention of which bonds it would buy, the assumption is that the ECB has managed to extract the promises from Italy that it required, and with the assurances of support from the governments of Germany and France, is likely to begin buying BTPs today. This need not be in size to impress markets: symbolism is important here. But a successful intervention in bond markets would mean that we would in all likelihood jettison our call for EURUSD at 1.38 by month-end even before the ink is dry on the forecast, and have us telescoping our 1.45 3-month forecast in by at least two months. EURCHF would also be expected to finally find decent support.
We are much less convinced about protection of a floor under USDJPY and if intervention does turn out to be a one day wonder, we have little doubt that USDJPY will seep lower again, eventually back through last week?s Y76.30 low.
Eurozone developments aside, much will depend here on whether Tuesday’s FOMC meeting does enough, via a strengthening of the commitment to – and longevity of – current policy settings and (though much less certain) expression of willingness to contemplate additional actions if warranted, grants risk markets enough of a reprieve from last week?s carnage to see the USD leak lower again. This morning’s G7 statement held out the prospect of coordinated intervention in the event of a disorderly move in markets; but at the same time professed that exchange rates should be set by the market. We do not see this as providing support for Japanese intervention on a orderly decline in USDJPY.
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http://www.easyforexnews.net/wp-content/uploads/2011/08/Daily-FX-Str_Europe_08August2011.pdf
BNP Paribas
Corporate & Investment Banking