Chinese data cheers risk markets
Better-than-expected data from Asia has been the catalyst for a risk rally this morning, with markets shaking off the threat from Greece. Singapore exports are a notoriously volatile release but nonetheless the 16% rebound in non-oil exports in December was a welcome turn in the recent data trend. Subsequently Chinese data also trumped expectations: Q4 GDP was up 8.9% YoY to cap a 9.2% GDP gain for 2011, while solid IP and improving retail sales completed the rosier picture. The data will go a long way towards easing fears of a sharper slowdown in China, although our economists caution that the slowing in fixed asset investment hints that selective easing policies have yet to have an effect. Nonetheless markets have cheered the data; after a slow start Shanghai equity markets have rallied as much as 4%, and the USD has been subject to broad selling – even against the beleaguered EUR. AUD has unsurprisingly been one of the outperformers, boosted also by strong Q4 production reports from miners, but AUDUSD has struggled ahead of the 200dMA at 1.0410.
EUR recovery to remain limited; but is FX market too complacent about Greek spillover into other currencies?
Following Friday’s S&P downgrades to a number of eurozone sovereigns, the ratings agency yesterday downgraded the EFSF (to AA+ from AAA). However market reaction has been muted: given S&P’s move on France and Austria the decision was to be expected, even if it came earlier than most were expecting. There may be some focus on the EUR 1.5bn EFSF 6m bill auction today (11:00 GMT) as a gauge of market sentiment, but it seems unlikely that the downgrade will impact the take-up significantly. Of more concern is the situation surrounding the Greek PSI talks. With time fast running out for agreement, Greek officials were said to be heading to IMF headquarters today in an attempt to break the deadlock, even as the Troika are set to arrive in Athens tomorrow; talks with creditors are also set to resume tomorrow. A conclusion on PSI+ this week is seen as a pre-requisite for the eventual disbursement of the second Greek aid package in time for a EUR 14bn bond redemption on March 20th. Greek officials hope to present an outline of a plan at the Eurogroup meeting in Brussels on January 23rd, and the details of PSI between February 6th and 10th. Failure to reach agreement by the end of the week will have markets contemplating a messy Greek default and the prospect of further contagion despite European assurances that Greece is a ‘special case’. In that scenario we struggle to see how risk currencies can hold at current elevated levels: an uptick in Chinese data is not going to rescue the situation. Given the European propensity to steer very close to the edge
of the cliff, we suggest positioning for a risk off through AUDUSD puts – now cheap by almost any measure, with absolute vol levels and risk reversals attractive..
Short EURJPY continues to do well; intervention remains a distant prospect
EURJPY has edged higher today but should remain under pressure as Greek negotiations struggle. Japanese FinMin Azumi has finally broken his silence, expressing his concerns over the falling EURJPY, but the sense of urgency is still low. Indeed just as the MoF hesitates to intervene in USDJPY when the USD is falling across the board, it seems unlikely that the MoF will attempt to half the EUR slide all by itself. Joint intervention is ruled out for as long as the EUR decline remains orderly. However the equation changes if the EUR-lower move morphs into a more general risk-off move, sending the USD higher across the board but USDJPY lower: at that stage intervention becomes much more likely. Short EURJPY remains one of our favoured 2012 trades and we have an end- Q1 target of 95.00.
BNP PARIBAS