– Japanese politics pushes USDJPY higher…..an opportunity to sell
Japanese news agency Kyodo reports that Prime Minister Yoshihiko Noda has stated that he wants to call an election for parliament’s lower house on December 16. Noda told Democratic Party Secretary-General Azuma Koshiishi of his intention but the ruling party’s deputy resisted. Noda, under opposition pressure to call an election he promised in August would be “soon”, looks to be leaning towards holding one as early as next month after pledging support for a controversial U.S.-led free trade pact. Support for the government is at its lowest since Noda took office in 2011. USDJPY has rallied in response hitting a high of 79.80 in Asia. We remain short USDJPY targeting 77.00 and would reiterate that this rally represents yet again a chance to establish short exposure. Our favoured US-Japan 2-year yield spread chart continues to signal greater downside risk suggesting that a level around in the high 78s is justified (see chart). Additionally, our BNP Paribas FX Positioning monitor continues to report that short JPY is the largest FX market position and is dangerously large at -41 on a scale of -50 to +50.
– EURUSD in a back-and-forth mode. We favour upside
The EUR has experienced a mixed session as FX markets navigated the volatile European headlines. German ZEW data did not prove to be the shot in the arm that the EUR needed and the economic weakness in the eurozone core is now looking increasingly evident. The current situation index fell from 10.0 to 5.4 – a new cycle low. Expectations unexpectedly fell back to -15.7 vs forecasts for a rise to -10. However, the EUR rebounded late yesterday on a report sourced to Die Bild magazine, suggesting that Germany may advocate a ‘bundling’ of Greek aid tranches into one 44B euro instalment. Finally, Greece sold 4B euro in bills today and the 5B euro bill redemption on Friday should take place relatively smoothly. Clearly, with the timing of the decision on Greece still uncertain, EUR bounces have remained relatively short-lived. However, as we move towards the eventual resolution to the Greek uncertainty (Euro finance ministers are holding another meeting next week), the outlook for the EUR should improve. Along with our long GBPUSD trade recommendation (target 1.68) we are cautiously optimistic for a EURUSD rebound.
– AUD firm, NZD slips on soft data…….dovish Yellen
The AUD has been trading with a firmer tone since the start of the week. Although the recent encouraging economic news from China has not necessarily translated into a broader improvement in risk sentiment, AUD in particular has received a boost. In addition to China, we also expect the Federal Reserve policy actions to offer support to the Asian currencies into year-end. In today’s comments, Fed Vice Chairman Janet Yellen said policymakers should link the low rate commitment to economic goals, rather than calendar dates. Although she also said it was hard for the FOMC to achieve a consensus forecast for the economy, the Fed has been evidently under-delivering on the employment part of its policy mandate. This statement should imply ongoing QE, with positive implications for AUDUSD, which we see at 1.08 by year-end. In the near-term, AUDUSD needs to clear the November high of 1.0480 to signal further upside. In contrast, the NZD fell after Q3 retail sales unexpectedly fell by 0.4% q/q. We maintain a short NZDCAD trade recommendation, targeting 0.7970.
BNP Paribas