- No oil price worries in evidence Friday
The S&P500 made its highest close since June 5, 2008 on Friday, while in G10 FX, SEK, representing the country most exposed to the global growth cycle, was the strongest performer on the day and second biggest gainer on the week versus the USD (+2.65%, just pipped by USDCHF down 2.65%). No sign here then that the relentless rise in crude oil prices is as yet generating major concerns about an imminent hit to global growth. Brent crude closed above the $125 mark for the first time in 10 months, although some comfort might be drawn from news that Saudi Arabia has increased crude exports in the past week. USDJPY (and various JPY crosses) continued their two week-long rally, USDJPY up 1.5% on Friday alone and +2.0% on the week; the close above the weekly ichimoku cloud has generated further upside momentum in Aisia this morning but the move has not been sustained. Key to watch here will be whether 2-year Treasury yields can continue to rise: they closed Friday at a new 4-month high of 0.31%, but still below the 0.32% high of the last six months; a reversal here should see much of the offshore community caught long USDJPY. But this may need a less positive tone from US data than was seen on Friday, with University of Michigan final CSI revised up to 75.3 from 72.5, and new home sales at 321k above the 315k consensus. Comments from St.Louis Fed President James Bullard, that there was not a current case for QE3 and (though not new news) that he expected the first Fed rate hike in 2013, appeared to resonate more than other Fed speakers. Philly Fed President Charles Plosser voiced (again) his opposition to the Fed buying MBS, in direct contrast to San Francisco Fed President John Williams who argued that this had been effective.
- EUR/commodity currency squeeze can extend, but we still favour gains vs. USD
EURUSD made a new high of 1.3486 for a 2.4% gain on the week, but commodity currency gains against the US dollar have been checked by the ongoing squeeze in short EURAUD and EURCAD positions. Also adding a touch of restraint here are the expressions of concern about consistent CAD strength from BoC Governor Mark Carney in a WSJ interview,
and on Thursday from RBA governor Stevens who noted that AUD had remained very strong despite a pull back in Australia’s terms of trade. But on the latter point, we note that both AUDUSD and the AUD in trade-weighted terms are back from their highs to almost the same degree than the Terms of Trade have slipped back since their Q3 peak. Concerns about China announcing growth objectives of sub-8% following the upcoming NPC have also been cited as reason for commodity currency caution, though we would note here the consistent gap between the conservative formal growth objectives and those realised in practise. We remain commodity currency bulls, but with potential for an extension of the squeeze on short EUR positions and central bankers evidently somewhat twitchy about currency strength it would not be surprising to see a short period of at best sideways trading in AUDUSD and USDCAD. The official China PMI release on Wednesday will be important. A move above 51.0 from 50.5 in January would be supportive for AUD and NZD.
- Room for EUR rally to extend
Since most of the past week’s run up in EURUSD came on Thursday and Friday, and largely represented the ongoing squeeze on EUR shorts, it is likely that Friday’s IMM data, showing only a small reduction in the net speculative EURUSD short, understates the extent to which futures positions have now been trimmed. Even so, there undoubtedly remains scope for an extension of the squeeze. Successful ratification of the Greek bail-out deal in the German, Finnish and Dutch parliaments this week should help, while residual worries about the PSI deal could be a factor that keeps asset managers cautious for now about reducing their underweight in euro-peripheral bonds. If and when the latter starts occurring, this could be the flow that drives EURUSD up towards our 1.40 H2 2011 targets (with support also likely from Reserve Managers). The new LTRO will be capturing much of the imagination in the early part of the week. We suspect a large (EUR400bn or more) allocation will prove mildly EUR supportive.
BNP Paribas