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FX Daily166 .pdf

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European Edition
31 October 2013
Non Independent Research – Marketing Communication

Post-FOMC price action shows market too short USD

The FOMC left its policy message largely unchanged from the September statement. Language was inserted noting that the
housing sector has slowed, and language from last month referring to recent tightening of financial conditions was dropped, no
doubt in recognition of the decline in bond yields and surge in equity markets since September. Yields backed up only
marginally in response to the disappearance of the financial conditions reference, but the USD posted a stronger rally, with
EURUSD dipping below 1.37 and Cable briefly below 1.60. The USD’s ability to rally simply on lack of new negative news from
the Fed adds more evidence to suggest that the market has become uncomfortably short USD. As we discussed in our FX
Quant Insight publication yesterday, our STEER™ frameworks suggests the EURUSD and GBPUSD now appear expensive
relative to key drivers, and USD shorts continue to look vulnerable.

No BOJ catalyst today

In line with our expectations, the BOJ left policy unchanged today and revised its GDP forecast higher to 1.5% for FY14 (from
1.3% in July) in its semi-annual outlook report. Our economists expect a small uptick to inflation estimates to reflect additional
fiscal stimulus. USDJPY remains very much at the mercy of USD drivers now. We expect the pair to push through 100 by yearend. As global yields rise and JGB yields remain low, the JPY should underperform. We look to rebuild cross-JPY longs.

Price data a risk for the EUR

Preliminary October CPI data today for the Eurozone could be a risk to stretched EUR long positioning. We agree with market
consensus that the headline y/y rate is likely to hold at last month’s 1.1% rate which was below the rate prevailing when the
ECB cut rates in May. Moreover, Spanish and German preliminary numbers released Wednesday came in weaker than
expected highlighting downside risk to today’s Euro area release. Italian numbers will also be released early Thursday, ahead of
the Euro area numbers. Slowing and below target inflation is likely to add to ECB concerns about EUR strength and gives the
central bank more scope to ease in response. A 1% or lower y/y rate today would likely weigh on the EUR.

RBNZ’s tightening bias boosts NZD

The RBNZ left policy rates unchanged and repeated that rate increases will likely be required in 2014. The central bank
adjusted its language surrounding the exchange rate, continuing to note that it remains “high” and adding that currency gains
provide it with some flexibility on the timing and magnitude of rate increases. This reference should not have come as a
surprise, echoing earlier comments from Governor Wheeler. Bottom line is that the central bank’s tightening bias remains intact,
underscored by robust economic growth and rapid house prices gains. This should support an NZD rebound into year-end.

Eurozone CPI running well-below 2%




BNPP Mkt Last

07:00 DE (Nov) GfK Consumer Confi
Nationwide House %
07:00 GB (Oct)
10:00 EU (Oct) HICP (Flash) % (y/y)
10:00 EU (Sep) Unemployment Rate % 12.0
11:00 IT (Sep) PPI % (m/m)
11:00 IT (Sep) PPI % (y/y)
12:30 US
Initial Claims K
GDP (monthly) %
12:30 CA (Aug)
12:30 CA (Aug) GDP (monthly) % (y/y)
13:45 US (Oct) Chicago PMI

Reuters Ecowin, Bloomberg, BNP Paribas








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