- Awaiting a catalyst for EUR/cross sell-off
EUR/crosses came under pressure today led by weaker Spanish auctions (2.5bn actual issuance vs. 4-6bn target) with a materially lower bid to cover compared to the 2015 issue (2.4 vs. 5.0). The ECB decision and press-conference (1245, press conf. 1330 London time respectively) is due next. There is no expectation of monetary action whatsoever with the ECB having made clear that it is in ‘wait and see’ mode with regard to the 3-yr LTRO program. However, watch out for EUR/cross negative catalysts which could come from (1) Draghi pointing to a less optimistic assessment of economic conditions and/or (2) a slightly more hawkish tone on inflation or showing some sympathy on the need to consider ways to withdraw stimulus (German position). While a hawkish ECB translating to a EUR sell-off is counterintuitive, this is possible if this massage sees EMU CDS widen and financial stocks sell-off. Note that over the past few months, EUR/G3 crosses have shown a better correlation with CDS rather than with yield spreads. The chart below compares an equally weighted average of EURUSD, EURJPY and EURGBP against a GDP weighted average of CDS for France, Germany, Italy, Spain and Netherlands.
- USD-US yield correlation to comeback?
Yesterday’s FOMC minutes confirmed one point for the FX markets; a dovish Bernanke no longer translates to a dovish FOMC. FOMC minutes showed only a ‘couple’ of members still arguing the case for additional stimulus measures in the event that the economy lost momentum. Looking forward, the dynamic seen in the first half of March (strong data= higher US yield= higher USD) could come back, having fizzled out over the past 1-2 weeks (notice how US 10Y are bouncing higher from key support levels). With most of Europe on holiday for Friday’s non-farm payrolls, there will be more interest on today’s ADP (exp. 206K down from 216K) and strong data should support USD further either via higher US yields (as QE3 is priced out) and/or equity risk-off sentiment.
- JPY-cross vulnerable heading into April 10 BoJ meet
USDJPY was Tuesday’s biggest post-FOMC minutes winner, however JPY-crosses have come under pressure this morning with the trigger having been a break of key 84.60/70 support on AUDJPY (which underpinned spot on 3 occasions since February). Looking ahead, USDJPY will continue to remain dependent on US yields which should keep spot
supported. However, with the CFTC showing historically extreme JPY-short positioning, and as we approach next week’s BoJ meeting (April 10), we would prefer to fade the run up in USDJPY in the next few days. Given extended position, we think that we would probably need a solid and independent JPY –ve catalyst i.e. further BoJ easing to get through the Y84.20 area. But despite continued political pressure on the BoJ (with reports the LDP are considering a proposal to amend the BoJ law), we regard market speculation of fresh action as early as next week as exaggerated. Thus JPY-crosses could be vulnerable into next week. If the BoJ were to cave in to the pressure it is much more likely to come at the second policy meeting (April 27), after the outcome of this month’s FOMC is known.
- Still too early to fade AUD sell-off
Negative news flow continues threatening still-long AUD positioning, with a surprise trade deficit in February (second month in a row) continuing to see AUD-crosses under the cosh. Yesterday’s RBA indicated that rates are likely to be cut in May provided the Q1 CPI release is benign, but we are not changing our call for a steady RBA policy this year until we see that CPI print (due April 21). Still, the market has moved to price in more rate cuts which should weigh on AUD. AUDUSD and AUDCAD continue to remain vulnerable. We remain short AUDNZD (from 1.2900) targeting 1.2500 which looks close to being achieved. The USDCNY fixing when Chinese markets re-open tomorrow could be important for short-term sentiment.
BNP Paribas