EUR pressured by ratings agencies, Spanish elections
USDJPY to head towards 80.00
We favour selling GBPNOK on the back of hawkish Norges Bank and expected strong GDP this week
The EUR in particular, and FX market risk in general, is under pressure as the headlines turn negative. Broad-based EUR weakness dominated on Friday due to a Fitch downgrade of Greece and concerns over the weekend?s Spanish elections. Those concerns have been borne out by the heavy defeat of Zapatero’s Socialists. Investors fear that the experience of Catalonia, where the public deficit was revised up following the elections, will be repeated in other regions. But the result also highlights the political difficulties of implementing severe austerity measures in the midst of an economic downturn – a dynamic that is increasingly complicating the management of the debt crisis.
Adding to the negatives for the EUR this morning is the S&P move to downgrade its outlook for Italy very late on Friday. To date, a high level of private savings and a relatively lower budget deficit has allowed Italy to escape most of the contagion from the peripheral crisis, despite its already-high debt-to-GDP ratio. While the move should be seen as a warning – there is no sign of imminent action from the ratings agency – it may nonetheless focus attention on the lack of growth in the Italian economy. Italian bond markets will be very much in focus for the day. The recent low of 1.4048 has been breeched; a break of 1.4000 thereafter should see more significant stop-losses. On the data front, Flash Eurozone PMIs will be watched but may be seen as of secondary importance to bond markets; but in any case, signs of slowing growth must be seen in the context of a very strong Q1.
While these further negatives dominate the news for now, the most immediate concern remains Greece. We are still some way from knowing how the Greek fiscal situation will be resolved, but if it is confirmed that all forms of restructuring/reprofiling are off the table then this should allow a grind higher in EURUSD in response. Indeed, while the EUR is challenged at the moment, the outlook is hardly better for the USD: US yields continue to grind lower and the US CDS continues to climb. The USD is gaining as risk aversion drives an unwind of positioning, not because it is a more attractive as an investment.
USDJPY held up despite the BoJ?s decision to keep policy unchanged. With the market seemingly short JPY and the latest US-Japan yield spread compression so far ignored, the risk is that USDJPY heads back towards the 80 level.
Canadian data disappointed on Friday. CPI came in softer than expected while retail sales were also weak. The CPI number relieves some concerns that the jump in inflation last month was the start of a trend. BoC rate hike pricing should ease back a little; the jump in USDCAD looks warranted. The break of the 100 day moving average at 0.9766 opens the way for further upside for USDCAD. However, our preference is to play CAD weakness against JPY.
Hawkish comments from the Norges Bank chief Elsen saying that more normal level of rates is double the current 2.25% and that economic strength justifies more NOK gains kept NOK well supported. With a strong Norwegian GDP expected later this week, we favour additional NOK gains; we would suggest expressing this against GBP.
BNP Paribas
Corporate & Investment Banking