– Better than expected Catalonia’s election result and pending Greek deal to push EURUSD higher
The regional election result in Catalonia, Spain, came out better than expected. The main separatist party CiU lost seats (from current 62 to 48 of 135 total) which should undermine its leader Artus Mas’s call for a referendum on independence for Catalonia. This should prove to be a EUR positive. The spotlight shifts to the EU Finance Minister meeting on Greece today. We expect eurozone finance ministers to finalize the Greek deal today, paving the way for the distribution of the next aid tranche in early December. Weekend press reports quoting French Finance Minister Moscovici that an agreement is closer-affirms our view. In addition, the upside surprise in the German IFO release last week marks a positive sign for 2013, suggesting economic data could gradually become less of a negative drag on the EUR. An improvement to eurozone financial confidence tends to lead EURUSD higher and we continue to expect further EURUSD gains, targeting 1.33 by year-end and to 1.35 as we move into Q1 2013.
– Odds of LDP win to influence USDJPY until December 16; But spot bias remains lower beyond
The sharp weakening move in the JPY over the past two months has been driving by speculative selling on building expectations of an aggressive BoJ easing, in our view. Net JPY CFTC positioning (a proxy for fast-money) has been consistently moving in a JPY negative direction since early October, when USDJPY began its sharp rally from the 78.00 level. With expectations of BoJ easing the main tactical driver, JPY can trade on the weaker side in the lead up to the December 16 Japan election as the likelihood of a more easing-focussed LDP election win becomes apparent; here the latest Yomiuri daily opinion poll (as of Nov 26) indicates the LDP remains in the lead at 25% vs. only 10% for the ruling DPJ. However, we believe the markets may be overestimating the ability of the LDP to make the BoJ ease aggressively. Moreover, while “expectations” of BoJ asset purchases could weaken the JPY, there is no evidence that actual implementation of BoJ asset purchases should see USDJPY rally. This was certainly the case throughout 2003 when USDJPY consistently fell despite hefty JGB purchases by the BOJ and it was only in Q2 2004 when the Fed began its tightening cycle that the USDJPY based and subsequently moved higher (See chart below). Ultimately lower US yields as Fed enacts open-ended QE (at the December 12 FOMC meet) should see USDJPY lower once again and we look for opportunities to establish a short USDJPY position.
– Fading global risks to weaken the USD, stay long AUDUSD
Risk appears to be back in an ‘on’ mode, as seen by the sharp close higher in the S&P 500 last week above the 100-day moving average. A combination of positive developments should, in our view, maintain this risk momentum over the coming weeks. First, we expect a Greek resolution today to open the path for the distribution of the next aid tranche early next month. Second, we look for the fiscal-cliff talks to resume this week. Although a swift deal is probably too optimistic, we believe an eventual compromise will be achieved well before the end of the year, probably in the form of postponing much of the fiscal contraction for at least six months to allow a broader deal to be worked out. Finally, we expect the Fed to expand QE3 on December 12, and Thursday’s positive Q3 US GDP revisions (we see a below-consensus 2.6% q/q reading) should do little to alter our long-held dovish outlook on the Fed. In the era of open-ended Fed QE and improving Asian growth, carry trade remains the near-term theme. We stay with our long AUDUSD recommendation entered at 1.0390 last week, targeting a rise to the 2012 high of 1.0850, with a stop at 1.0150.
BNP Paribas