- Nothing standing in the way of the risk rally?
Global PMIs have added support to the overall risk environment, hinting that a more significant global downturn has been averted. PMIs from China, UK, Norway, Sweden and the Eurozone confirmed that growth remains steady. Even the US ISM, while the headline number was weak, saw new orders jump to the highest level since April 2011; export orders also improved. A weaker ADP employment number for January and a downwardly revised number for December failed to take the steam out of the risk rally, perhaps because ADP has been a poor indicator of non-farm payrolls. Meanwhile, a stream of media reports on the Greek PSI+ kept the markets travelling with eternal optimism even if a new deadline is announced almost daily. The latest reports suggest that the IIF expects a deal next week, helping risk and the to EUR rally and pushing peripheral yields lower. With markets setup for a positive resolution, the potential vulnerability could come if the announcement is delayed beyond the February 13 deadline.
- Weak Swiss PMI and expected weakening trade balance should reaffirm EURCHF 1.20 floor
Unlike some of the other global PMIs, the Swiss PMI slipped further into contraction territory, highlighting the impact of the strong CHF on the overall economy. Despite the weak PMI, EURCHF is trading around the 1.20 level and we believe that a test of the 1.2000 level may be inevitable at some stage. But, weak economic indicators such as the PMI suggest that the SNB will firmly defend its EURCHF 1.20 floor; the Swiss trade balance out later today should reinforce the SNB’s commitment to the floor. Meanwhile, the Australian December trade balance surprised to the upside, driven by stronger exports of iron ore and fuels, propelling AUDUSD through stops above 1.0750. However profit-taking quickly capped the move and ahead of tomorrow’s NFP the pair may be consigned to a 1.0650-1.0750 range.
- Divergent MoF-BoJ rhetoric says intervention will remain unsterilised and is therefore a selling opportunity
MoF portfolio flow data showed that last week Japanese investors bought USD 15bn worth of foreign bonds (and foreigners sold another USD 6.3bn worth of Japanese bonds) – despite which USDJPY lost ground on the week. Clearly the vast majority of those flows are currency hedged, implying that the recycling of the current account surplus will not impact the fx market, and that the surplus will continue to weigh on USDJPY. With the pair threatening a break below 76, FinMin Azumi has once again warned of action (although we have not yet heard the ‘decisive’ codeword); in contrast, the BoJ’s Yamaguchi appears more relaxed about the recent yen rise, saying that the BoJ is not weighing immediate action. We continue to see the BoJ as reluctant to support further easing measures in the absence of progress on fiscal reform. As such, any intervention spike in USDJPY will be sterilised and will ultimately fail to reverse the trend lower.
- US Jobless claims to remain under 400k
US Jobless claims are expected to come in below 400k for the third week in a row. A positive improvement may lift expectations for the non farm payroll number on Friday even though the numbers post-date the January NFP calculation date. The employment component of the non-manufacturing ISM which is a relatively good predictor of NFP will be
released afterwards, and so the markets will not have the luxury of refining their estimates with the benefit of this data. We expect some moderation in hiring (+125k) reflecting the reversal of some seasonal effects, but the underlying trend should show an improving trajectory.
BNP Paribas