– RBNZ gives wings to the kiwi, AUD supported by better-than-expected Aussie employment print
The RBNZ left the OCR unchanged at 2.50%, as expected, but the statement was hawkish. The statement note several positive hints on the economic outlook, notably the expectation of strengthening domestic demand, a less threatening global backdrop and a more positive China outlook. Although NZD was noted as a headwind to the economy, but the Governor said that criteria for FX intervention were not met. The governor also reiterates that he expects rates to remain unchanged until 2014. NZDUSD rallied post-announcement, opening the 0.8310 (previous high) technical level; we stay bullish, targeting a gain to 0.84 by year-end. In Australia, November’s solid employment report (+13.9k) against expectations for a flat reading, provided a boost to the AUD as rate cut expectation was scaled back. In addition, broader USD weakness on our forecast for QE and improving China related sentiment will support the AUD. Watch the monthly Chinese economic prints on 9 December. We stay with our long AUDUSD trade entered at 1.0390, targeting 1.0850.
– Watch BOE and ECB monetary meeting today
The positive euro sentiment has been deflated slightly by a weaker Spanish 10Y auction yesterday, S&P downgrade of Greece’s long term foreign currency rating to “selective default” from a CCC rating and a FT report of a whistle blowing case – a European bank hid USD 12bn in losses during the financial crisis. But beyond a knee-jerk reaction, we expect the EUR to remain supported on what we believe will be a USD-negative December Fed policy announcement. Further out, we suspect that year-end window-dressing for market participants’ still underweight euro zone assets could see EUR crosses continue to push higher. The spotlight turns to BoE and ECB monetary policy meeting later today. For the latter, our economists believe that the economic assessment is likely to be similar to the one from the November meeting, while the new staff projections should reinforce the message of a gradual recovery. In our view, the OMT is the most likely policy tool to be activated going forward. A restatement of OMT should reinforce a more positive eurozone tone.
– JPY vulnerable on pre-election rhetoric
USDJPY rallied on a Nikkei report citing a nationwide survey of voters that showed the opposition LDP is likely to win more than half of the seats in the lower house at the December 16 elections, while Prime Minister Noda’s DPJ may emerge with less than half of the seats currently held. Further evidence of the LDP’s likely return to power remains supportive of USDJPY given its leader Shinzo Abe’s aggressive rhetoric on the BoJ policy. Although we acknowledge the near-term upside risk of USDJPY, we note that USDJPY long positioning remains at extreme levels according to our measure. From a fundamental standpoint, our economists have noted that the mainstream LDP may not necessarily back an aggressive BoJ view. We also believe that the Fed’s QE3 will have an ongoing negative impact on US yields thus standing in the way of any sustained rally in USDJP and for the pair to fall back to 76.00 in three months’ time.
– Latest fiscal-cliff gyrations offer hints of compromise; we remain short USD
In the latest twist to the fiscal cliff saga, around 40 House Republicans reportedly signed a letter calling for the exploration of “all options” on taxes and entitlement programs. One Republican lawmaker said he could accept higher taxes above a 500K income threshold, the clearest sign so far that Republican lawmakers are likely to show some bargaining flexibility and the number of ‘defectors’ is large enough to have the potential deal pass through the House. This is consistent with our view that a compromise will be reached, possibly even before the official December 31 deadline. On the data front, we maintain our below-consensus 25K forecast for the Nov payrolls report, despite a 118K rise in the ADP private sector employment survey. We remain comfortable with a short USD bias into the NDF and over the weeks ahead.
BNP Paribas