– No surprise from BOJ; USDJPY traded off the highs
USDJPY reacted in a ‘buy rumor, sell the fact’ manner as BOJ’s easing measures fall short of shock and awe. As widely expected, BOJ expanded the size of asset-purchase program by JPY 10tn to JPY 101tn in a unanimous vote (5tn of Tbills, 5tn of JGBs), amid persistent pressure from the newly elected PM Shinzo Abe to beat deflation. The size of the new lending scheme (unveiled on Oct 30) will be around JPY 15tn, in line with expectations, and will start in June 2013 until March 2014. BOJ downgraded December economic assessment, stating that the economy had weakened and that this weakness was likely to continue, versus its assessment in October that economy to remain relatively weak for the time being. Still, BOJ held off any bolder easing measures today. They kept inflation target at 1% (instead of changing it to 2%), with BOJ governor Shirakawa stating that BOJ will review inflation goals at the next policy meeting in January. Watch comments from BOJ governor at press conference at 0715 GMT, albeit we do not expect any surprises in his stance. We hold to our view that an ‘as expected’ expansion of the asset purchase program will see both spot USDJPY and implied volatility backing off, especially since short-JPY positioning remains extreme and technical momentum indicators are overextended on the upside — daily RSI above 70 and the bearish trendstall indicator on USDJPY also hints of a reversal.
– EURUSD rally not over yet
The EURUSD’s rally has temporarily extended above 1.3300 overnight with some help from Germany’s December IFO business confidence index which printed a stronger than expected reading of 102.4 (the highest level since July). It is clear that it has been driven more from the EUR side with several EUR-crosses continuing to rally. Our view remains that further out performance is possible as position-adjustment ahead of the year-end continues. Aside the EUR supportive flows, the main focus for the market remains on the negotiations related to the US fiscal-cliff. Hopes for an imminent deal suffered somewhat of a setback on Wednesday as President Barack Obama said he would veto the House bill put forward by Speaker John Boehner. Still the President was keen to stress that there were only a few hundred billion dollars between the Democratic and Republican offers. This suggests that two sides are too close not to come out with a deal and we remain optimistic that the positive news will transpire in the coming days. This should support the risk environment and set markets for a positive start for risk to 2013. The BNP Paribas STEER™ model continues to suggest that the rally in EURUSD remains supported by fundamentals and currently, spot would have to move above 1.3340 (upper band) for the move to look overstretched. Meanwhile EURGBP is also vulnerable to a further squeeze higher today if the UK November retail sales come in line with our below-consensus 0.1% m/m decline. Over the medium-term however, we believe GBP will outperform EUR based on more positive growth fundamentals.
– NOKSEK pullback is a buying opportunity
NOKSEK has tested some significant technical levels, currently trading just above 1.1760 channel support in place since August. The Norges Bank left rates unchanged at 1.50% for the fifth meeting in a row. Our economists highlight that the accompanying statement had a balanced tone overall, sounding relatively dovish on external developments but relatively hawkish on domestic developments. The statement did not offer any major changes in the economic assessment; back in October the bank’s rate profile suggested that it intends to start raising rates in Q2 of next year. The macro data flow in recent months has been strong and we also suspect that with global economic trends improving, external conditions are likely to turn more supportive going forward. Accordingly, the risks to our Norges bank views are probably on the upside, and we remain comfortable with a positive NOK outlook, interpreting the recent NOKSEK pullback as a buying opportunity for an eventual move higher above 1.2000.
BNP Paribas