– No surprise from BOJ; USDJPY traded off the highs
USDJPY reacted in a ‘buy rumour, 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 T-bills, 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. 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 as fiscal cliff solution likely over the days ahead
The recent rise in EURUSD – which pushed the cross above 1.3300 on Wednesday – 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 1.3360 (upper band) for the move to look overstretched.
– EURGBP vulnerable to moving lower on any rebound in UK data
Thursday’s UK retail sales release was slightly softer than market expectations. Retail sales ex-fuel were up 0.1% m/m in November (+0.4% expected), while October’s release was revised to -0.5% from -0.7%. We expect any GBP weakness off the back of the release to be limited. We expect that GBPUSD can remain supported as the USD remains underpressure on expectations of progress on the fiscal cliff to support risk appetite, while EURGBP is at the top of its trading range since May. Our economist’s highlight that a pick-up in consumer confidence suggests that a recovery in retail sales over the months ahead. In the meantime, the next major releases for GBP are the final GDP print tomorrow and the PMIs in the New Year. We expect any signs of strength in these data to push EURGBP lower.
BNP Paribas