– EUR rallies on more positive bond market sentiment
The recent trends of EUR strength and JPY weakness have returned with EURUSD back above 1.3350 and USDJPY back in sight of 89.50, having fully retraced the recent decline. The catalyst for the EUR has been a continued improvement in sentiment in the eurozone debt markets. A local press report suggesting Portugal may be returning to the debt markets with a 5Y syndicated bond issue in February provided the initial jolt, and another set of strong debt auctions only added to this sentiment. Spain conducted its second auction of the year (3y, 5y 30y) and has already managed to fill 9.5% of the EUR 121bn issuance target. Our fixed income strategists think the recent two Spanish auctions and the Italian 15Y auction has set a strong start for peripheral bond markets. This positive spill-over should continue to dominate and EUR crosses should face further upward pressure. We hold onto our long EURSEK (target 8.80) and long EURCHF (target 1.2500 trade recommendations, the latter now closing in on its target. Meanwhile, EURUSD dips continue to present buying opportunities; BNP Paribas STEER fair value stands at 1.3430, roughly a figure lower from yesterday. With little in the way of data from the US today, earnings season will continue to dominate risk-sentiment 61 companies reporting, 20 of which are from the financial sector. Friday’s Chinese data (December IP, retail sales, FAI and Q4 GDP) will be important into next week; there has already been some risk-reduction in Asia today ahead of those figures.
– Scope for AUD weakness on crosses, but AUDUSD dips to be limited
Pretty weak AU labour market report suggests Feb 5 RBA rate cut potential (40% priced) may be too low. Our economists look for a 25bps in February, which is a non-consensus call; only 8 of 29 economists surveyed in Bloomberg expect a rate cut. For AUD, we think AUDUSD dips may be limited (broader risk-on support, potential strong China data tomorrow) and stay with our long recommendation targeting 1.0850. But there is scope for AUD weakness on some crosses, like AUDNZD and EURAUD. AUDNZD has moved closer to 1.2490 support (3m line connecting lows) as we head into tonight’s CPI release from New Zealand. Local economic data has been strong, with NZ consumer confidence overnight surging to the highest since mid-2010. A potentially stronger Q4 CPI print tonight (consensus 1.2% vs. 0.8% prior) may allow AUDNZD to break lower. Interest rate swap spreads continue to suggest a dislocation and further downward potential for the cross. Meanwhile, BNP Paribas STEER implied fair-value is lower at 1.2448 (up from 1.2395 yesterday). Similarly, the broader positive EUR sentiment suggests further EURAUD upside potential above Monday’s 1.2710. BNP Paribas STEER implied fair value stands at 1.2795, close to the top of the recent range.
– USDJPY does a back-and-forth on confusing political rhetoric
USDJPY has continued trade back-and-forth given the varying political rhetoric and has now almost fully recovered the decline seen since the beginning of the week. Economic Minister Amari commented that his comments on the JPY earlier this week (that excess JPY weakness not desirable) were misinterpreted. Apparently, he actually meant that yen ‘is still in the process of correction’ from excessive strength and that he did not state that USDJPY at 100 is a “turning point”. Still, there is no denying that the political rhetoric has turned more two-way, with LDP heavy-weight Ishiba yesterday suggesting JPY weakness could hurt specific (agriculture) industries. We think it will be very difficult for the BoJ to satisfy already elevated expectations for a strong response on Jan 22. 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. Our JGB strategists believe that the recent spike in the 20Y JGB yield (above 1.75% will entice Japanese life-insurance companies to increase allocations to JGBs (as opposed to foreign bonds) in the months ahead.
BNP Paribas