– Crunch time for BoJ and USDJPY
Some profit taking was seen in long USDJPY and yen-crosses positions ahead of tomorrow’s Bank of Japan policy announcement. Japan’s economic minister Amari said he is considering attending the BOJ meeting while the government and BOJ is expected to formulate a joint statement after the meeting. The potential policy steps include (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. Our economists suggests that this will imply an increase in the JGB target in the asset purchase programme (APP) from JPY 20tn annually to 30-40tn. While many of the above measures have been well flagged and priced in by the markets, 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 should 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, and this will spark profit taking on short-JPY positions.
– ECB talks down rates; EURUSD still a buy on dips
FX markets ended last week in a EUR-centric mode as EUR-crosses sold off on the back of ECB commentary. As we have been highlighting, the recent EUR upswing has been supported by rising EZ short-term rates, where position unwinding has been a factor. To an extent, markets are still adjusting to the signals from the ECB meeting, while there is a growing focus on European banks paying back the LTRO loans. ECB Executive Board member Benoit Coeure effectively talked down the uptick in rates on Friday, suggesting that they early LTRO repayments will not have an impact on the Eonia rate. Our European rates strategist expects that the pace of LTRO repayments will be gradual this year (EUR 70-100bn). This is unlikely to lead to upside pressure on rates, although there remains a risk of faster repayments and a more significant rate impact. In Germany, the centre left opposition has defeated Chancellor Merkel’s coalition in elections held on Sunday in the state of Lower Saxony. Whilst the SPD and their Greens won by an extremely narrow majority of one seat against Merkel’s coalition (CDU and Free Democrat), this election has been viewed as a bellwether for national elections to be held on September. This week, the markets will be watching comments from ECB Weidmann today and Drahi tomorrow. On the data front, the eurozone PMIs on Thursday are expected to show a further improvement. We remain long EURCHF (new target at 1.2800) and EURSEK (target 8.80). GBPUSD dipped below its 200-day MA of 1.5909 but is starting to look cheap on our valuation metrics: BNP Paribas STEER pegs fair value at 1.6220 making it one of the most undervalued crosses. The BOE minutes on Wednesday and UK Q4 GDP on Friday will further influence GBP.
– BoC could hurt CAD this week
AUD, CAD and NZD have been under pressure despite solid data from China last Friday. The US debt ceiling negotiations are likely to gradually populate headlines – Republicans signalled on Friday that they intend to pass a 3-month increase in the debt limit. Our US economists suggest this implies that late March/early April could be a challenging period for fiscal policy, keeping growth contained until a resolution is made. Debt ceiling uncertainty spells further risks to commodity currencies although we expect it will be monetary rather than fiscal policy that will remain the key FX driver. Meanwhile, this week our economists expect the BOC statement on Wednesday to be quite dovish, including a downgrade to economic outlook expected. With some tightening still priced in for Canada (+15bps) for 2013, CAD could under perform.
BNP Paribas