– EUR rally continues even after LTRO boost
EUR-crosses remained under persistent upward pressure ahead of today’s LTRO announcement, and the move has continued following the results. The ECB announced that 278 banks will make early repayments of EUR 137.2bn on January 30. This is higher than a Reuters poll of EUR 100bn but still smaller than recent market chatter of an even higher figure (e.g. 150bn). The immediate market reaction (a further sell-off in euribor and EUR rally) suggests the market has been positively surprised. We would see this as further evidence of the underlying improvement and “positive contagion” (to use ECB Draghi’s words) in the eurozone and hence a continued positive for the EUR. However, this is a multi-week/multimonth view, and some of the moves (EURJPY above 122, EURGBP above 0.8500) look too extreme to sustain, and could be vulnerable to pre-weekend profit-taking. But medium term, it is clear things are improving; another indirect sign was Thursday’s rate hike by the Danish central bank. They have moved from a position of preventing DKK strength to countering weakness to maintain the peg to EUR. German data continued its string of out performance with today’s IFO which was stronger on all sub-component readings. We main our positive EUR exposure via long EURCHF and long EURSEK.
– GBPUSD oversold, looking for a bounce
GBPUSD has continued to remain under pressure, but this has been largely a function of the sharp move higher in EUR crosses (EURUSD and EURGBP), thus more a EUR centric factor. However, a softer UK Q4 GDP this morning (0.0% y/y vs. +0.2% consensus) contributed. However, with the MPC largely having discounted the prospect of a weaker Q4 (payback for super strong Q3), this should not have policy implications. Our economist veers away from exaggerating the negative print given that oil and gas sector were weaker (due to shutdowns of rigs for maintenance). The release of the UK PMIs next week will be important. Much of this soft economic picture is probably already priced in, and we see scope for a bounce in GBPUSD above 1.6000 in the days and weeks ahead. This week, we entered, based on signals from our quant models, a long GBPUSD recommendation at 1.5860, targeting a rise to 1.6185. Further out, we expect GBP to be an out performer within the G10 space this year as forward-looking economic indicators suggest an improving growth outlook for the UK. A critical support level for GBPUSD is the February 2009 bullish trend line currently around 1.5612.
– JPY downside momentum strong, but watch political rhetoric ahead of the G20 meeting
The JPY has surprised once gain, with the sell-off resuming strongly; USDJPY is has broken through both 90 and 91 in the past 24 hours. Japanese political rhetoric has once again contributed to JPY weakness –PM Abe suggests that a BOJ law revision is on the cards. Nikkei news reports that the Ministry of Finance will outline a JPY 93.5tn fiscal 2013 budget, JPY 600bn more than the 2012 budget. The BOJ minutes of the December 19-20 meeting revealed that one member recommended eliminating the IOER (interest rate on excess reserves)- but this is nothing new and was voted 8-1. In the near-term we suspect USDJPY dips will continue finding buyers, while there is some resistance ahead of 90.75. Looking further ahead, we believe the recent dynamic- foreign criticism of JPY weakening policies and Japanese defence of such criticism- should continue heading into the G20 meeting in mid-February, potentially adding to the JPY volatility. The date is important as it also coincides with (a) the next BoJ meeting and (b) Government’s nomination of candidates for the BoJ Governorship. Our positioning indicator still suggests JPY short positioning as the heaviest in the G10 space.
BNP Paribas