Market Mover - BNP PARIBAS - Investment Services India

ECB to remain active onliquidity measures and thesecondary marketUS markets driven by EMUnews until 2 NovemberFOMC meetingFurther upside on EURUSDJPY’s upward trend todevelop furtherkey driving force going into the turn of the year will remain the fundamentalpicture. Within the eurozone, leading indicators have already deterioratedand hard data will follow their fall. This week, PMIs fell further below 50, withforward-looking sub-indices, such as new orders, still sliding. This favours anECB rate cut: the macro-economic background sets a compelling case for acut straight away, although the fact that November will be Draghi’s firstmeeting may be a complication. We still see the ECB moving in Decemberas the most likely scenario, in tandem with the release of new economicprojections, with a 50bp cut aimed at boosting confidence. In other words,the macro environment will remain bond supportive for a while and the‘japanisation’ theme is likely to resurface once EMU stress has easedsignificantly.Regarding liquidity, the latest measures could have a negative impact onliquidity and bank lending as banks have to commit to raise EUR 106bn inorder to show Core Tier 1 capital of 9% by June 2012. The ECB will have toremain active on the liquidity front. The 12mth tender conducted this weekattracted reasonable, but not that strong, demand. However, both liquidityand its duration were increased. In addition, the latest EU decisions arelikely to improve the credit quality assessment on banks. Thus CDS haveroom to decline. We recommend receiving OIS/BOR spreads.In the US, economic data continue to surprise to the upside and equitiesremain well bid, so the near-term momentum for rates continues to be to theupside in our opinion. We have preferred to express this view via 5s30ssteepeners, given that the market could run with the idea of UER/inflationtargeting or an MBS purchase programme at next week’s FOMC meeting(both of which should support the 5y sector). We may not carry this positionthrough the actual meeting, but if the market prices a meaningful chance ofthis in the days before, then we believe this gives an added kicker to 5s30ssteepeners.In the FX market, the outline of the latest eurozone rescue deal has beensufficient to push EURUSD decisively through 1.39 and to above 1.40. Thefall in the USD remains very much part of a broader improvement in risksentiment. This improvement has been driven by better US data, alongsideexpectations that upcoming changes to the Fed’s policy could mean USrates are lower for even longer, and some easing of fears of a China hardlanding.The fact that the euro is weakening – not strengthening – against commoditycurrencies in particular is testimony to the above argument. We see the USDhas continuing to have downward potential and we marginally prefer toexpress this via the likes of the AUD and JPY than the EUR. The comingweek's RBA meeting will be the key focus for the former; the market is fairlyfully priced for a 25bp rate cut, meaning the AUD’s upside risk is significantif, as we expect, the RBA stands pat. But we do look for a cut in December.The ECB and Fed meetings now loom large as the next key drivers for themajors. A rate cut from the ECB, or strong hint thereof at Mr. Draghi’sinaugural press conference, could take some of the heat out of the euro butprobably not for long. Language from the FOMC meeting that suggests ratescould be kept low for an even longer “extended period” has the potential todrive a more lasting weakening in the USD.The Bank of Japan increased the size of the Asset Purchase Program byJPY 5trn to JPY 55trn, directed at JGB purchases. However, the decisiondisappointed some market participants, which had strongly expected theextension of maturities of JGBs subject to purchases.This latest easing has been accompanied by an acknowledgement that theJPY could strengthen further in the short term. We continue to expectUSDJPY to head lower, all the more so if US treasury yields do fall after theFOMC meeting.Cyril Beuzit 27 October 2011Market Mover 3 www.GlobalMarkets.bnpparibas.com