Market Economics | Interest Rate Strategy - BNP PARIBAS ...

We continue to favour bullish AUD strategies as long
as the overall growth picture in China is maintained
and global liquidity remains ample, as currently looks
to be the case. However, we would now favour short
EURAUD positions to participate in anticipated
further AUD gains as the EUR’s recent corrective
rebound appears to be coming to an end.
Chart 4 shows that, historically, there has been a
close inverse correlation between the German Ifo
expectations index and EURAUD. This can be
explained by Australia’s status as a net exporter of
commodities, and Europe’s as a net importer.
Typically the Ifo index has been a timely indicator of
turning points in EURAUD. However, we do not
expect this simple historical correlation to continue to
hold in the same way. The current environment is
very different with the focus on fiscal consolidation.
Hence, the current turn lower in the Ifo is unlikely to
disrupt the longer-term down trend in EURAUD in our
view.
EURAUD rebound nearing completion
We recently established a tactical long position to
take advantage of a short-term corrective rebound in
EURAUD as the unwinding of extreme euro short
positions generated a recovery. Indeed, data from
the last commitment of traders report (as of Tuesday
6 July) showed a huge scaling back of short euro
positions. The net euro short position declined to
38,909, a hefty 34,761 drop in contracts on the week,
which was the second-biggest short covering in EUR
in recent years. This position adjustment is nearing
completion, implying a return to strategic short euro
positions is now possible. Hence, we would look to
use any further EURAUD corrective gains over the
coming week, which could see EURAUD rebound
towards the 1.48 area, to establish renewed short
positions targeting the 1.20 area by the end of the
year.
Chart 5: Australian Business and Consumer
Confidence
130
Consumer Confidence
125
120
115
110
105
100
(RHS)
95
90
85
Business Confidence
(RHS)
80
75
02 03 04 05 06 07 08 09 10
Source: Reuters EcoWin Pro
Chart 6: EURAUD Risk Reversal
Source: Reuters EcoWin Pro
50
40
30
20
10
0
-10
-20
-30
-40
Ian Stannard 16 July 2010
Market Mover, Non-Objective Research Section
52
www.GlobalMarkets.bnpparibas.com 50