– EURUSD rally less of an ECB concern
EUR-crosses have recovered in the European session after comments from ECB officials negated comments from Euro group Juncker that the EUR exchange rate is “dangerously high”. EURUSD and EURGBP have both regained about 50% of the losses of the past two sessions, but crosses like EURAUD and EURJPY have seen a more subdued recovery. This morning ECB Nowotny said the EURUSD rise is “not a big concern” while member Praet suggested the EUR remains an input for policy but not a goal in itself. Both comments follow ECB President Draghi who said the currency was at its longterm average level, and suggest the EURUSD is not yet a major concern. Our own measure of long term fair value for currency, BNP Paribas FEER, indicates that EURUSD remains in line with its fair value of 1.3200. Moreover, BNP Paribas STEER, which incorporates movements in financial markets, suggests the short-term fair value remains higher at 1.3540. Accordingly, we continue to think any dips in EURUSD provide buying opportunities. We continue to favour EUR on the crosses, holding long EURCHF (target 1.2500) and EURSEK (target 8.80) trade recommendations. Both crosses remain just of their overnight highs near 1.2400 and 8.67 respectively.
– USDJPY vulnerable to a deeper correction
JPY has continued to correct higher for the second session driven by signs other Government members may not be on board with PM Abe’s prescription for aggressive JPY weakness. LDP secretary Ishiba, considered an important pillar of support to successful contest the upper house elections, followed Economics Minister Amari in suggesting excessive JPY weakness could hurt certain industries. We think the market is beginning to come around to the view that BoJ will be unable to satisfy elevated expectations for a strong response next week (Jan 22); it is not even clear if big response comes next week, or pending the change of the Governor in early April. Given our view that the JPY sell-off in recent months has been predominantly driven by foreign investors (not necessarily by the large Japanese investor base), the potential for a JPY snap-back remains high. In addition, given the context of still pretty dovish Fed comments and earnings uncertainty (20 and 22 financial sector companies on Wednesday and Thursday, respectively), the risk is for some further downside in US yields (10y is down by 9bp over the past three trading days) will add to this upward pressure on JPY.
– Extended long NOK positioning vulnerable to CB rhetoric
Verbal intervention from Norges Bank Deputy Governor Qvigstad yesterday has contributed to NOK under performance with EURNOK rallying up to 7.4300 (6m resistance line) and NOKSEK back to the bottom of recent ranges. Governor Olsen speaks today (11:30 BST), and while it is a closed to media as it happens, details may be released afterward. While we like NOK from a fundamental perspective, it is vulnerable from a positioning perspective. NOK is the most lopsided long as per BNP Paribas overall FX positioning indicators, at extremes last seen in May 2011 (see page 10 of recent Global FX Plus).
– Commodity currencies lag with EUR dominating; Aussie jobs data in focus
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 six months. The dominance of the EUR in guiding price action is having an impact in subduing the USD crosses. Both EURCAD and EURAUD 1m implied correlations to the EURUSD continue to remain at their highs for the past 12 months. 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. Thursday’s Australia employment report may provide some idiosyncratic AUD risk, especially the jobless rate. The consensus is for an increase to 5.4% (from 5.2%), our economists forecast 5.3%.
BNP Paribas