- USD may have further legs with dovish Fed rhetoric ignored
The European session saw some profit taking with the USD softening a tad against the JPY and EUR in response to a pause in the move higher in UST yields. EURUSD has recovered further from the 1.3004 low in Asia but this seems more related to a 1.3000 option barrier being defended. Equity markets are a lot more mixed following price action seen in Asia with Chinese stocks in particular under pressure for another day – also explaining the recent AUD under performance. Looking ahead, we think the theme of the USD strengthening on higher US yields likely has more to run with Fed commentary (Bernanke stating yesterday that the US recovery remains frustratingly slow) being ignored for now. We have a number of speeches next week from the FOMC-dovish camp (Bernanke, Dudley, Evans) next week but unless there is a strong hint of easing, upward US data surprises could continue to support USD in our view.
- US data important as markets re-prices economic tail risk
Looking ahead every scrap of US economic news will be keenly observed, particularly anything concerning the US labour market. One poor employment report may be all it takes to have the current co-trend in US bond yield and risk assets come to a crashing halt, and with that the USD uptrend. The weekly claims data may therefore be as important today as PPI, the Empire State and Philly Fed manufacturing surveys, or the January TICS data. However this last is of considerable interest, after the December data revealed that US residents repatriated portfolio capital to the tune of $40bn (see chart). If this were to be repeated in January in what was a consistent ‘risk-on’ month, it would corroborate the view that US investors see better investment opportunities at home than abroad, with implications for the durability of the current USD rally.
- Limited EURCHF correction as SNB stands pat
EURCHF corrected about two-thirds of the past week’s rally after the SNB maintained the 1.2000 floor as was widely expected. However, the move has stabilised since with CHF crosses finding support. The SNB revised down their forecast for inflation (0.3ppts in 2012, 0.2ppts in H1 2013) further below their price stability definition of around 2% inflation. This suggests all the more that the SNB will continue to defend the 1.2000 EURCHF floor and a further easing in euro-peripheral stress and a pick up in global bond yields will further help soften the CHF. However, something to keep a closer eye are the risks of defending the floor i.e. the prospect of asset inflation driven by aggressive easing. The SNB included a comment noting growing signs of imbalances in the mortgage/real-estate market, a further increase of which could lead to financial stability risks. While already touched upon by acting Chairman Jordan in recent speeches, this theme could become more important ahead of the next SNB meeting in June, even though it is not on the markets’ radar for now.
- EURGBP still headed lower despite focus on UK ratings
Fitch’s decision late Wednesday to put the UK on negative ratings watch, mimicking actions last month from Moody’s, carries some risk to the pound in so far as strong overseas demand for AAA-rated gilts has been one reason why BoE QE has failed to soften Sterling. For now though, we expect that the strong link between EURUSD and EURGBP will hold, and this means that if EURUSD does break below 1.30, EURGBP is likely to move lower in its wake.
BNP Paribas