– EUR on a year-end squeeze higher
The EUR remains a notable out-performer with EURUSD breaching 1.3200 to trade at a 7-month high. Euro crosses – EURCAD and EURAUD — also rallied. In European news, S&P lifted Greece’s credit rating from selective default to B-, but we think that USD re-balancing, position adjustments and EUR repatriation are the dominant drivers of EUR’s broad outperformance. We believe our year-end target of 1.33 will be reached. Today, a potential further improvement in Germany’s December IFO business confidence data (after the flash eurozone PMIs improved rose for the month) could offer some additional upside momentum to EURUSD. On the US fiscal front, the latest fiscal cliff headlines overnight appear to be a bit of a set-back, with more tough rhetoric on both sides and House Speaker Boehner invoking the possibility of ‘plan B’ whereby the House will vote on a bill that raises tax rates on those earning more than USD 1mn per year. But, in the market’s mind and in our own view, the latest moves are probably within the realm of negotiating tactics. Since the gap between the two parties has narrowed considerably, the deal still appears in sight, perhaps before the end of the week. This should support a sustained risk-on environment in favour of further gains in risk assets.
– JPY could rebound on an uneventful BoJ on Thursday
USDJPY made another push higher to 84.44 in Asia trading today on BOJ easing hopes and reports that the new-coalition government has agreed to pass a large fiscal extra budget that could exceed JPY 10tn. November trade deficit worsen to JPY 868.5bn from a revised JPY619.4bn deficit as exports declined for the sixth consecutive month. The market is geared up for Thursday’s Bank of Japan announcement amid persistent pressure from the newly elected PM Shinzo Abe; suggesting that the risk is now tilted towards a disappointment. We think that the likely options for the BoJ tomorrow include another JPY 10tn expansion in the asset purchases (like October). A Nikkei report suggested that the BoJ’s 1% inflation goal may be doubled, but that is not before the January BoJ meeting which also coincides with an update of the BoJ’s medium-term outlook. Our economists think any such BoJ-government accord could come only after the BoJ change of leadership in April. Hence, the extended short-JPY positioning remains vulnerable to profit-taking following an uneventful BOJ tomorrow.
– SEK rallies after Riksbank; NOK eyes Norges Bank
The Riksbank cut by 25bps as widely expected. The forecast repo-rate profile indicated a more balanced rate profile, with rates remaining lower for longer. Following the decision, SEK strengthened across the board (NOKSEK below 1.1800. EURSEK below 8.75) while Swedish rates (Dec 2013 FRA) backed higher to reflect this more neutral policy rate profile. While this SEK strength may persist in the near term, SEK could become increasingly sensitive to data releases, in particular jobs data (next release 24 January) with the central bank having revised higher their estimates for the jobless rate (8.1% for 2013 vs. 7.9% prior). The next Riksbank meetings are in February followed by April. We continue to strategically favor NOKSEK upside with the Norges Bank likely to enter a tightening cycle in H1 2013. The Norges Bank statement on today will be in focus. We, along with consensus, expect unchanged rates but the tone of the statement could be slightly hawkish as policy makers remain concerned about rising house prices.
BNP Paribas