– EUR still driving broader FX movements
Trading high-beta/USD pairs according to traditional risk-appetite indicators has been a disaster of late with the EUR’s dominance distorting FX markets. That as illustrated this morning following stronger than expected prints in all Chinese data (GDP, IP and retail sales). AUDUSD is 50 pips lower following the release, and the sharp 50 pip rally in EURAUD (back above Monday’s 1.2710 high) may be the reason. The sharp readjustment higher in market-implied EUR rates (large sell-off in euribor) and better eurozone debt sentiment is perpetuating the dominating position held by EUR. With no peripheral debt auctions next week, there could be some focus on ECB comments from Weidmann (Monday) and Draghi (Tuesday) regarding the EUR. We also have eurozone PMI’s (Thursday) expected modestly stronger. We continue to like holding onto EUR exposure and remain positioned via long EURCHF (target extended to 1.2800) and EURSEK (target 8.80). Softer UK retail sales this morning has see EURGBP further bid alongside EURUSD, putting a dampener on GBPUSD seeing it move back toward the bottom of its recent 1.5800-1.6300 range. GBPUSD is as a result looking cheap on our valuation metrics; BNP Paribas STEER pegs fair value at 1.6220 making it one of the most undervalued crosses. The Bank of England minutes (Wednesday) and UK Q4 GDP (Friday) next week will further influence GBP.
– USDJPY ahead of Tuesday’s BoJ meeting
USDJPY consolidates in a 80.70-90.20 range with the move linked to more “source” stories ahead of Tuesday Bank of Japan meeting. This includes measures like (a) moving from 1% goal to a 2% inflation target, (b) open-ended asset purchases until that target is achieved, (c) scrapping the 0.1% floor on short-term rates. These source stories could continue until late Monday and provide and keep JPY under pressure. However, it will be tricky to assess the aggressiveness of the BoJ actions on the day as they are likely to entail several measures, while it is difficult to assess what exactly the broader market (especially outside Japan) expects. Our economists think we get a doubling of the JGB target in the asset purchase programme (APP) from JPY 20trn annual to 40trn and expand JGB maturities from 1-3Y up to 1-5Y. While many of the above as generally well flagged, a cut the interest on reserves could be viewed as dovish (as the BoJ have been long opposed to such a measure). On the other hand, investors expecting more radical measures such as foreign bond purchases could be disappointed as such measures would face international opposition. All in all, we suspect it will be challenging for the BoJ to surprise market expectations next week and this will spark profit taking on short-JPY positions. The lack of evidence that the big Japanese investor groups are participating in this JPY move also adds to our suspicions.
– Weak NZ CPI see RBNZ bets pared; BoC could hurt CAD next week
A much weaker print on New Zealand Q4 CPI (0.9% y/y vs. 1.2% expected) saw AUDNZD spike a figure higher (above 1.2600) however the reaction has dissipated somewhat with the cross back below 1.2580. But as local economists begin to further push back their calls for RBNZ rate hikes (from H2 2013 to Q1 2014), NZ swaps have hardly moved (with the 2013 rate profile already flat). As a consequence, the bearish dislocation between AUDNZD and 2Y swap spreads we pointed out yesterday continues to persist, signalling AUDNZD a figure lower than current levels. On the other hand, our FX positioning analysis (page 10 of Global FX Plus) finds NZD to be one of the most crowded longs. Next week will be important for the CAD; our economists expect the Bank of Canada statement (Wednesday) to prove quite dovish with a downgrade to economic outlook expected. With the most tightening priced in for Canada (+15bps vs. flag for NZD, -40bps for AUD) for 2013, CAD could under perform next week.
BNP Paribas