– Soft Aussie CPI print reinforces expectations of a 25 bp rate cut in February
Aussie Q4 CPI printed a touch softer at 0.2% QoQ (vs. expectations of 0.4%) and 2.2% YoY (vs. expectations of 2.4%). The measures of underlying inflation — the trimmed mean and weighted median CPI also printed 0.1% weaker than consensus, rising 0.6% and 0.5% QoQ, respectively. AUDUSD dipped 40 pips post-data as the softer CPI reinforces expectations of a 25 bp rate cut by RBA in February. Our economist expects a 25 bp cut in February, but expects this to be the last cut for this cycle. Still, with the China recovery story intact coupled with news that House Republicans will pass a proposed suspension in the debt ceiling through 19 May on Wednesday, risk sentiment should be supported and we stay with our long AUDUSD position.
– BoC could undermine CAD on crosses, but less so on USDCAD
The CAD has been a clear underperformer in the commodity currency bloc. AUDCAD broke above the November high of 1.0471 yesterday. Solid auto sales drove the 0.2% m/m (0.8% m/m in volume terms) gain in the Canadian November retail sales, but core sales fell 0.3% m/m. We believe CAD is likely to face downside risk around today’s BoC meeting. While the hawkish bias is unlikely to be unwound completely, our economists expect the statement (and the accompanying MPR) to contain a downgrade to the economic outlook. This implies the output gap will probably not close until late 2013, which would reduce the urgency for policy normalization. Our economists have consequently pushed back their call for the BoC to raise rates by a full calendar year to mid-2014. With OIS still pricing in a tightening profile (+14.5bps over 12 months), there is a risk of an adjustment in rate expectations in response to the BoC announcement. USDCAD already looks too high relative to relative 2Y interest rate swap spreads (see chart), hence any rally should be capped by the November peak of 1.0018. But CAD could under perform on the crosses, notably against EUR and AUD.
– EURUSD bias higher by more optimistic eurozone data; favour long GBPUSD as STEER signal its undervalued
An initial wobble in the EUR has been swiftly reversed yesterday, helped by a much stronger German ZEW print (31.5 vs. 12 expected). Our economists generally look for stronger eurozone data later this week — PMIs on Thursday and German IFO business confidence on Friday. Overnight, some profit-taking sent EURGBP, EURCHF and EURJPY lower, but EURUSD around support around 1.3280. The comments by ECB President Mario Draghi had few surprises with muted market impact. He mainly echoed the tone of the recent ECB press-conference and once again highlighted the improvement in the financial market conditions, stating that “the darkest clouds over the euro area have subsided”. Despite the recent wobbles, we believe players remain broadly underweight the EUR and that position adjustment is likely to support further gains. We remain long EURCHF (new target at 1.2800) and EURSEK (target 8.80). Elsewhere, we see a tactical opportunity in long GBPUSD where our STEER short-term fair-value model is signalling a sizeable undervaluation. We have initiated a GBPUSD buy recommendation with an entry level of 1.5860, a target of 1.6185 and with stop placed at 1.5700.
– USDJPY trades lower following BOJ announcement
USDJPY has been trading below the 89.00 level as BOJ’s announcement disappointed market expectations. Meanwhile, German officials have been firing the shots in the currency war. Bundesbank’s Jens Weidmann saying looser monetary policy and a weaker yen may put BoJ’s independence at risk and increase Japan’s tensions with trading partners. A senior ruling-party politician said that Germany may raise the issue of the yen at the next G20 finance ministers’ meeting (in February). Nevertheless, the rebound in JPY could continue in the near term given still stretched JPY-short positioning.
BNP Paribas