– EUR rally intact despite Juncker’s comments; stay long EURCHF and EURSEK
EURUSD came under some pressure after comments from the Luxemburg PM Jean-Claude Juncker (Chair of the group of eurozone finance ministers, but stepping down at the end of January) who was quoted as saying that the EUR exchange rate was “dangerously high”. The timing of these remarks is somewhat surprising, coming in less than a week after ECB President Mario Draghi said the currency was at its long-term average level. We thus suspect these comments are largely a “one-off” and not the beginning of a campaign by European politicians to talk down the euro. We prefer to fade any EURUSD pullbacks as our positive view remains broadlly intact. Our STEER short-term fair value model suggests EURUSD is still somewhat undervalued and there is scope for the pair to move to at least 1.35. We continue to also favor EUR on the crosses, including long EURCHF (target 1.2500) and EURSEK (target 8.80) trade recommendations. EURCHF rallied above 1.2400 on Tuesday, while front-end vols have jumped and risk-reversals moved strongly to favor EUR strength. While upside momentum is likely to slow, fundamentally we look for further gains. Our peripheral spread indicator – which correlated well with EURCHF before the 1.200 floor was put in place- moved sharply higher in early January.
– USDJPY vulnerable to a deeper correction
The JPY bounced back following comments from Economics Minister Amari that too much JPY weakness could work adversely by increasing import costs. The reaction indicates that with positioning extreme, the bar remains high for the BoJ to positively surprise the market at its meeting next week. US economic data offered some support to USDJPY as US December core retail sales rose by 0.6% m/m. After Monday’s balanced remarks from Fed Chairman Ben Bernanke, the flurry of Fed commentary continued with the regional Fed Presidents Rosengren, Plosser and Kocherlakota. While none of these comments were substantially market-moving, we note the clearly dovish tone from the Minneapolis Fed President Kocherlakota who said the Fed can provide more stimulus by reducing its unemployment rate threshold to 5.5% (from 6.5%) and Boston Fed President Rosengren who said that there was scope to enlarge QE if there was no progress in the labor market. US earnings season will be stronger in influence broader risk-sentiment in the days ahead as 20 and 22 financial sector companies on Wednesday and Thursday. In the context of dovish Fed comments and earnings uncertainty the risk is for some further downside in US yields (10y is down by 9bp over the past three trading days). This, in turn, could prompt a deeper pullback below 88.00 in USDJPY.
– Commodity currencies lag; China data may provide catalyst for a catch-up
Commodity currencies have continued to lag the move higher in EURUSD; AUDUSD has failed to break above the 1.0600 level on four separate occasions over the past 6 months. The underperformance of the commodity bloc comes despite sharply higher CNY fixings last week (over 1%) and a bullish tone in Chinese equities. The under performance appears linked to EUR being the biggest FX driver at present. The 1m implied correlation of EURUSD with EURAUD at 61% remains near its peak of the past 12 months. The implied correlation of EURUSD with EURCAD is even higher at 77.8%, a 12-month high. So long as the focus remains on the EUR, both AUDUSD and USDCAD could remain kept in check. We would need to see a catalyst to result in either an out performance in the commodity bloc, and/or a sharp sell-off in the USD. Stronger Chinese data on Friday (December IP, retail sales, FAI and Q4 GDP) may provide that needed catalyst. A projected tick higher in the jobless rate in Thursday’s Australia employment report could also support AUDUSD.
BNP Paribas