– BoJ just meets consensus – USDJPY at risk of fall
The BoJ expanded its asset purchases by JPY 11trn (to JPY 91trn), pretty much meeting expectations ahead of the event, with the split as expected as well (5trn JGBs, 5trn bills, 1trn CP, corporate bonds, ETFs and REITs). USDJPY corrected lower following some disappointment down to 79.28. We implemented a short USDJPY recommendation at 79.65 yesterday targeting our year-end forecast of 77.00 with a stop placed at 80.70 (See FX Strategy Flash: Implementing Short USDJPY – 29 October 2012). We stress that the rally in USDJPY has largely been driven by the rise in US-Japan yield spreads that are now retreating and could fall much further. Additionally, the market is short JPY which creates a vulnerability to an unwind. Our BNP Paribas proprietary positioning indicator shows the JPY to be the most extended short within G10 markets. Looking ahead, a weaker US employment report Friday (via a rise in jobless rate) could weigh on spot further. Here we point out that there is no confirmation following a WSJ report suggesting the NFP release could be delayed into next week following weather disruptions.
– USD to hold modest strength today as weather disruption continues
The general mood in subdued (weather distorted) trading had been one of modest risk-aversion with the USD better bid across all G10 currencies barring JPY. This has partially reversed today with the USD softer against all its G10 counterparts. But with NY markets shut till Wednesday, data today could take on secondary importance and a projected pick up in US consumer confidence later today (BNPP forecast for 74 vs. 72 consensus) may not have too much of an FX impact. Assuming some sense of normalcy returns on Wednesday (with NY markets potentially opening), fundamental drivers could once again gain more prominence. The key points to highlight are NOK (Wednesday’s Norges Bank decision) and GBP (Thursday’s UK PMI) ahead of Friday’s US employment report. Our bias would be for the GBPUSD to recover on better UK PMI and NOKSEK to grind higher on a combination of a slightly more hawkish Norges Bank (relative to Riksbank) and potentially weaker Swedish PMI on Thursday.
– EUR faces downside risks ahead of November 12 Eurogroup; May present buying opportunity
We maintain our multi-month constructive EUR view but the next fortnight could see some correction as eurozone-related uncertainty increases a notch ahead of the November 12 Eurogroup meeting. On Spain, expectations on the timing of an aid request have already been adjusted forwards to November (from mid-October) following suggestions Germany preferred a Spain aid request to be clubbed with that of Cyprus, Greece and Slovenia. Should these countries seek aid but Spain continue to hold out, then this could see some slight increase in eurozone stress and a correction in EUR. Still, our bigger picture view is one of EUR holding in better with the capital flows picture improving. Combined with our forecast for USD weakness on Fed QE, EURUSD should ultimately move up to 1.3500 by year-end on EURUSD. Meanwhile, Greece will remain of some focus given recent lack of internal unity to meet Troika demands on labour reform. Our economists expect a resolution to be found by the Nov 12 Eurogroup meeting. Wednesday’s Eurogroup conference call is the next focus.
– AUD and NZD to remain well supported
We look for the commodity currencies (AUD, NZD and CAD) to continue to perform well and they continue to remain our forecast out performers. In comments today, RBA Deputy Governor Lowe suggested that the AUD could remain higher for longer therefore requiring lower local rates, and that the threshold for intervention was quite high. This in stark contrast to S. Korea where there is increasing vigilance over the pace of KRW appreciation (BoK and regulator looking to monitor FX forward positions on banks’ books from next month). As a result, freely floating high yield currencies (AUD,NZD,CAD) could receive an additional layer of support as authorities look to slow pace of EM FX appreciation (as was case in H2 2010).
BNP Paribas