– Year-end position squeeze helping EUR
The EUR is the strongest link in FX this morning, outperforming G10 and Asian currencies. On the news front, better euro zone composite PMI and a more hawkish sounding ECB Draghi interview suggesting a January rate cut is less likely, are helping. However, our analysis suggests that the EUR may be benefiting from a positioning perspective. As we highlighted in the December 6th Global FX Plus, overall EUR positioning had been cut back substantially between mid-September and November linked to uncertainty on when Spain requests aid. This subdued positioning looks at odds with continued improvement in sentiment. We wouldn’t be surprised to see EUR positive flows dominate on year-end window dressing (euro zone equities far outperformed G10 counterparts since June). Accordingly, we expect that our 1.3300 year-end EURUSD forecast is reached, especially following the Fed’s dovish action at this week’s FOMC. The pace of decline in the USD leg however could moderate next week if we do not receive any positive signs on US fiscal cliff negotiations. Next week is a crucial week and provides a narrow window of opportunity to get a deal before Christmas. The latest signs are not particularly encouraging with tough rhetoric on both sides and should this continue next weeks, markets could become nervous. However, we are still relatively optimistic that a deal will be coming before the end of the year.
– JPY short positions vulnerable to toned-down LDP rhetoric next week
The coming week could be most crucial for JPY following Sunday’s Japan election. We believe a substantial part of JPY weakness over the past two months has been driven by speculative accounts betting on the BoJ putting in place policies to specifically weaken the JPY. The catalysts for this positioning have been provided by heavy-handed rhetoric from the LDP leader Abe to put pressure on the BoJ to provide a bazooka and weaken the JPY. Hence, markets will be increasingly sensitive to whether this remains valid next week. Our view is that Abe will unlikely sound that aggressive as a PM as he came across as the leader of the opposition. This could lead to profit taking on JPY crosses and with USDJPY implied volatility coming under some pressure as that assumption is dialled down. The Bank of Japan decision (Thursday) will also be important. Should they maintain the status-quo and only expand the balance sheet by JPY 10trn (similar to October), this could be seen disappointingly as well, sparking further profit-taking on JPY-crosses. This morning’s Tankan survey came in weaker with the headline large manufacturers DI worse (-12 vs. -10 exp). However, the CAPEX plans were more encouraging (6.8% vs. 5.4% exp) for the 2012-13 fiscal year.
– Positive China sentiment to help commodity bloc
This morning’s stronger Chinese HSBC PMI print (14-month high) supports our view that the Chinese economy has bottomed and is on a cyclical upturn. The Hang Seng China Enterprises index, a good gauge for sentiment in Chinese equities, has accelerated higher to levels not seen since mid-March. From a markets perspective, that suggests that the “doom and gloom” China scenario which was at a pinnacle around Q1, is being priced out. There are also more signs a structural shift to more balanced growth, with PMI new orders higher even as export orders are softer. For currencies, the data are supportive for the AUD, but especially the NZD which directly benefits from stronger consumption in China. We continue to hold our long AUDUSD recommendation targeting 1.0850. Reports suggesting China may relax or abolish a rule that allows foreign investors to invest in equities (in addition to fixed income) should also help.
BNP Paribas