BNP Paribas – Stay short AUD & USD/JPY to rise further

From the French bank’s stat team:

AUD weakness justified…..stay short AUD

AUD’s weakness this morning is no surprise given the stretched positioning amid the weakness of the data releases. The RBA kept interest rates unchanged for the 12th straight policy meeting and signalled it would stay on the sidelines for a while to come. Yet again, RBA Governor Stevens stressed the AUD appears overvalued. Trade data was poor while the Q2 current account deteriorated sharply to AUD -13.7 billion – the weakest level since 2012. Furthermore, we expect Q2 GDP (Wednesday) to show growth slowing down significantly, to 0.3% q/q from 1.1%. Data released Monday reveals that the current net long AUD exposure at +26 (on a scale of -50 to +50) is the largest since April 2013 according to our BNP Paribas Positioning Analysis (see chart). Accordingly AUD is very vulnerable to a pullback on weak macro-economic data. It is no surprise that AUD has weakened this morning and we anticipate more weakness to come. We prefer to play short AUD on the crosses and we maintain a short AUDCAD recommendation targeting a move to 0.97.

USD/JPY to rise further

We expect the national ISM manufacturing index to have decreased 1.1 points, to 56.0 in August. The regional surveys released for August were decisively negative, with the three surveys released so far averaging a 1.8 point drop. On balance, both the regional surveys’ average and the ISM manufacturing index have been poor predictors of monthly manufacturing output, but our forecast reflects that both are telling a consistent story of still-solid expansion in manufacturing activity. Still, for the week, the major driver will be the employment report on Friday which at 225K and a fall in the unemployment rate to 6.1% on Friday will likely be the more important driver for the USD this week following the recent more hawkish minutes in August. We maintain our long USDJPY recommendation targeting 107. We focus on mounting expectations for announcements that the GPIF will allocate more funds to foreign assets. On Friday, GPIF announced it had pulled almost $22 billion from investments in JGBs and other yen bonds in Q2, with the money shifting largely to cash and foreign investments.

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