USDJPY Tests Lie Ahead
FX markets were confined to fairly narrow trading ranges on Monday with limited tier-one data flow in Europe. Sight deposits held at the SNB increased by CHF +2.6bn last week to CHF 373.3bn. This is a fairly small increase once again – further signs that the EURCHF floor is under limited pressure at the moment and the cross has started to push higher as a function of wider EUR buying in the market. The true test will be whether the pre-floor correlations re-establish themselves and a wider move higher in risk therefore translates to EURCHF pushing higher as well. A Japanese holiday prevented USDJPY from making any further upward progress overnight, but US 10y yields did climb to a 4-month high on Friday.. We note that only six weeks after QE2 was announced in November 2010 10y yields had risen almost 100 bp, and a similar reaction in response to QE3 could also lead to some short-term yen weakness. Meanwhile the newsflow in Europe has turned less positive. Spanish bonds, sold off on Friday after Spain’s Economy Minister de Guindos noted that the government will put forward a “new set of reforms to boost growth” – suggesting that Spain wants to convince the EU leaders that it does not need a bailout program. The Eurogroup meeting on Friday was largely uneventful but headlines over the weekend laid bare political divisions on how to introduce a pan-European regulatory framework. While EU Financial Services Commissioner Barnier set an “ambitious objective” of having the bank supervisor ready by the year-end, Germany, Sweden and the Netherlands noted that it is an “impossible” and “unrealistic” goal. German Finance Minister Schaeuble said he wants “stress tests” on banks before the transfer of oversight. His Swedish counterpart noted that nations are “far away from reaching a compromise” and the coming months will see “a lot of tough negotiations”. Considering that a single supervisor is a necessary condition before the ESM could start recapitalizing Eurozone banks, a continued deadlock could help put a stop to the recent euro rally. On Friday Egan-Jones downgraded US rating to AA- from AA. Late on Friday, we went short AUDUSD as a trade recommendation via a 6m option structure.
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