– JPY bounce can extend further
Headline that the next BoJ governor candidate needs to have an understanding of PM’s Abe easing policy plans, coupled with report that the government intends to earmark JPY 5.2tn for public works projects under a supplementary budget (JPY 13.1tn) prompted a knee-jerk rebound in USDJPY back above 87.00. However, we reiterate that the overextended market positioning in long USDJPY suggests at the risk remains for a pullback. Of note, overnight headlines suggesting the possibility of the BoJ doubling its inflation target to 2% at the January meeting had limited market impact. The possibility of an increase in the inflation target has been discussed for some time now and should not come as a surprise. More importantly it remains to be seen how rigid the new goal will be, i.e. whether there will be a formal accord between the BoJ and the MoF. Given that much has been priced in, there is clear risk of ‘selling the fact’ on the BoJ announcement. We also note the recent heightened positive correlation between USDJPY and Japanese equities (nearly 80% on a threemonth rolling basis), which suggests that foreign investment inflows have been highly hedged. Hence, profit-taking by foreign investors on their long Nikkei positions can lead to added selling pressure on the USDJPY as FX hedges are lifted.
– EURUSD dips provide buying opportunities ahead of Thursday’s ECB meeting
EURUSD remains within its recent trading range. Rumours of a French credit rating downgrade (subsequently denied) weighed on the pair during the N.American session as did the subdued tone in the equity markets. That said we believe EURUSD pullbacks will remain shallow. The main event this week will be Thursday’s ECB meeting and press conference. Our economists expect no change in rates (70% probability). The case for no change is arguably reinforced by recent data including the December eurozone economic confidence which surprised to the upside for a second straight month, rising to 87.0. We wouldn’t be surprised to hear that there continued to be a “wide discussion” on rate cuts as was the case at the December meeting, but we doubt that the headlines will have a substantial negative impact on EURUSD. Later in the week, our fixed income strategists point out that auctions from Spain (Thursday) and Italy (Friday) could slow (but not reverse) the pace of tightening in peripheral spreads. BNP Paribas STEER™ indicates EURUSD is cheap relative to fundamentals, with fair value higher at 1.3305.
– Weak AUD retail sales; but stay long AUD
Aussie retail sales disappointed in November, slipping 0.1% MoM compared to forecast for a 0.3% gain following a flat reading in October. AUDUSD pullback initially on the poor data as the markets started to price in an increased chance of a RBA rate cut in February. But we continue to favour our long AUDUSD position entered at 1.0390, targeting 1.0850 on expectations that a rebound in Chinese’s economy would lend support to the AUD, while QE keeps the USD soft. Watch Chinese trade figures and CPI due on 10 and 11 January, respectively.
– Riksbank minutes slightly dovish; we enter a long EURSEK recommendation
The Riksbank minutes reiterated that the 25bps December rate cut came on account of a sharper growth slowdown, but suggested that the future risks stemming from the high level of household debt was a constraining factor for a bigger easing. The majority favoured one 25bps rate cut and a flat repo-rate profile, but two members considered there was scope for a larger 50bps cut and an even lower rate profile. BNP Paribas FX Strategy has established a long EURSEK recommendation from 8.5650 targeting 8.8000 with a stop placed at 8. We believe the SEK is overvalued on a number of metrics.
BNP Paribas