– Earnings season uncertainty could provide tactical support for USD
The focus continues to remain on the EUR and the JPY, less so on USD. Comments from Bernanke overnight remain in synch with our view that QE continues well into 2014, but by not clarifying the QE timeline have not provided that green light to sell the USD short-term. The JPY has been the biggest gainer this morning correcting 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. In the days ahead, US earnings season will be stronger in influence broader risk-sentiment in the days ahead: 39,70 and 61 companies report today, tomorrow and Thursday respectively, up from just 11 yesterday. This includes 20 and 22 financial sector companies on Wednesday and Thursday. On US data, our economists forecast weaker US data today; US retail sales (0.0% m/m vs. +0.2% consensus) and Empire State manufacturing (-3.0 vs. -1.0). Weaker data should result in theory result in a weaker USD as it suggests a larger and longer QE). However, this reaction may not work as well today, and worse data could dent risk-sentiment and keep the USD better supported today. But this support will be tactical. Our view remains the same strategically: sell USD on rallies. We stay long AUDUSD targeting 1.0850.
– EUR rally dominates; Stay long EURCHF and EURSEK
The strongest dynamic in FX continues to the broad-based push higher in the EUR, with EUR crosses very well supported. Given the catalyst was the more hawkish ECB meeting last week, hypothetically a softer euro zone CPI print tomorrow (2.2% unchanged expected) could result in some profit-taking. But our economists do not expect the softer German EUharmonised CPI today (2.0% vs. 2.1% expected and prior reading) to spill over to the euro zone data print. Accordingly, the EUR should remain supported on dips. We continue to hold long EURCHF (target 1.2500) and EURSEK (target 8.80) to play further EUR gains. EURCHF rallied as high as 1.2380 yesterday, but spot has corrected some of that move in European trade. However, 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 and continues to flag further gains. The increased focus on EUR has seen better UK housing data (RICS house price balance highest since mid-2010) ignored. EURBP has continued to track EURUSD higher, with EURGBP breaking 0.8300 and some key resistance levels defining the prior 2011-12 downtrend. This has kept GBPUSD subdued in a range, with spot now looking undervalued as per BNP Paribas STEER (fair-value at 1.6280).
– Commodity currencies lag; China data may provide catalyst into next week
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 Wednesday’s Australia employment report could put further pressure on AUDNZD.
BNP Paribas