- CHF and JPY to stay in the spotlight, both at risk of renewed strength.
- EURUSD more prone to fall than rally barring sharp improvement in global risk appetite.
- We favour short EURJPY and short EURAUD here.
CHF and JPY, rather than the USD per se, look like remaining at the epicenter of market focus in the early part of the week. CHF is susceptible to renewed strength if the speculation regarding the SNB pegging CHF to the EUR fails to find succor in any official pronouncements over the weekend or early next week. We remain sceptical this will occur, notwithstanding local Swiss press reports on Friday suggesting the main Swiss political parties will not criticize any SNB decision to go down this route. Note that Friday’s IMM data shows a significant paring of (already modest) net short USDCHF positioning amongst speculative traders in the week through Tuesday, before the peg speculation gripped the market. The IMM is but one source of speculative trading, but it does tend to corroborate the evidence that much of the inflow to the Franc has been deposit flows and other ‘real money’ activity and which may not quickly reverse unless and until the underlying drivers of some those flows (including mistrust of local banks in some parts of the Eurozone) become less relevant.
USDJPY came tantalizingly close to the Y76.25 March spike low last week with no sign of BoJ action. Given the absence of any indication that public G7/G20 commitment to co-operative and co-coordinated policy actions will extend to support for BoJ intervention, there is a significant risk of a sharp break lower in USDJPY. The BoJ may be condemned to try another bout of intervention, but short of an open-ended commitment, we doubt it will prove any more successful than previous episodes. GDP for Q2 is due Monday and though the post-eathquake/tsumani output recovery process began as early as late April, this will not likely have spared the economy a third successive quarter of decline output. With activity having picked up again well before the end of the quarter, policy implications should be minimal.
EURUSD is unlikely to quickly test either edge of the broader 1.40-1.45 range this week. Though the decline in Italian and Spanish bond yields this week has been impressive – and should be sustained after Friday’s approval by the Italian cabinet of a EUR45.5bn two year austerity budget without necessarily needing significant ECB support, EURUSD is already trading well above fair-value estimates based on all manner of rates spreads (including the euro-periphery versus Germany). If we also see no easing back in XCCY basis swaps (albeit evidence of dollar funding stress is actually hard to find) we consider the lower end of the current range to be the more vulnerable. Given our thoughts on USDJPY above we therefore like to be short EURJPY here.
We are also on guard for further evidence of China allowing faster CNY appreciation in the early week USDCNY fixes (and note US VP Biden visits China form Wednesday). If this is the case, AUDUSD has potential to rally by way of catch up to movements in CNY NDFs and where the historical relationship is very strong. EURAUD also has plenty of potential to further retrace the recent sharp run up under thus scenario.
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BNP Paribas
Corporate & Investment Banking