– Japanese politics may keep USDJPY elevated, for now
Comments on Thursday by Shinzo Abe, the leader of the opposition LDP party in Japan, is likely to cause investors to remain short JPY positions ahead of the lower house election on December 16. Abe has called for more active monetary easing from the BoJ and suggested the need for a 2-3% inflation target and a weaker value for the yen is required to boost the Japanese economy. While Abe’s comments are likely aimed at maintaining his lead in political polls, the strength of his statements are likely to cause investors to remain short JPY ahead of the election. Indeed, this morning’s price action pushed USDJPY to 81.25 and has triggered the stop on our short USDJPY recommendation at 80.70. Investors are likely to remain bearish yen over the weeks ahead as the LDP’s political rhetoric continues, but other fundamental metrics for USDJPY indicating that upside pressure on USDJPY is likely to be limited. 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. BNP Paribas STEER also indicates that USDJPY has been overbought. Furthermore, our BNP Paribas FX Positioning indicates that the market is already holding substantial short JPY positions, which may limit scope for aggressive JPY selling to continue to take place.
– US data and events support our dovish Fed and bearish USD view
Wednesday’s US economic developments offer further support to our dovish Fed views. The minutes from the October FOMC minutes said “a number of participants indicated that additional asset purchases would likely be appropriate next year after the conclusion of the maturity-extension program”. This is arguably the clearest signal to date that policymakers are increasingly looking to roll Operation Twist into outright Treasury purchases when they meet on 12 December, in line with our long-held view. USD price action recently, and our analysis of investor positioning, suggests that investors are not holding positions to take advantage of a shift in Fed policy to outright Treasury purchases.. We see the December Fed meeting as a potential trigger for the next round of sustained USD weakness, especially if it coincides with a successful resolution to the US fiscal cliff uncertainty and some easing in the Eurozone debt tensions. We continue to expect EURUSD to move towards 1.3500 by year-end. In terms of US newsflow on Thursday, the Empire state and Philly Fed manufacturing surveys are expected to decline, while Fed speakers today include Bernanke, Plosser, Dudley, Fisher
and Lacker. Except from Richmond Fed’s Lacker (who dissented in September), comments are likely to be in line with the FOMC minutes published on Wednesday.
– Weak UK newsflow to cause investors to remain cautious on the pound
Following on from Wednesday’s dovish commentary from Governor King and soft employment report, UK retail sales disappointed on Thursday with ex-auto retail sales declining 0.7% m/m (-0.1% expected). We view that King’s comments are not substantially enough to cause a sharp decline in GBP due to the UK economy continuing to appear favourable on a relative basis to the eurozone and US. Nevertheless, Wednesday’s close below the 200 day-ma may continue to trigger an unwind of long GBP positions – our FX positioning analysis suggests that investors continue to hold moderate long Sterling positions. Over the week ahead we may see position clearing dominate sterling price action, but beyond this we view that a move higher in GBPUSD will be driven by broad USD weakness and we continue to expect substantial Cable appreciation by year-end.
BNP Paribas