– US data to shift the focus to USD weakness
Overnight US data did not offer a clear direction for the USD as solid December durable goods orders report was countered by soft existing home sales, with the latter confirming the weakness in the housing sector. The main data release today is the January consumer confidence, which we see it falling to 63.5, in line with the deterioration in the Michigan consumer sentiment. Weaker consumer confidence reading will reflect the impact of the 2% payrolls tax cut and, unlike during the 2011 debt ceiling episode, are likely to feed into a slowing in the actual consumer spending. Our US economists have pencilled in a sluggish Q1 growth of just 1% q/q saar after a 1.3% pace for Q4 (GDP release due on Wednesday). Given that the Fed is also announcing policy this week, we see a refocus on the US calendar, which should support some of the recent laggards, notably, the AUD. We believe that the key takeaway this week will be that hopes for an early end to QE3 are unfounded, which should bring about broader USD selling pressure. We stay long AUDUSD originally initiated at 1.0390. AUDUSD garnered support today from the rebound in NAB business survey — business confidence index rose to +3, the highest in five months in December, following a fall to -9 in November. Business conditions also improved to -4 from -6 in the prior month. Elsewhere, the recent negative UK factors have led to the sell-off in GBPUSD triggering the 1.5700 stop loss on our long trade recommendation, where we exited the trade.
– Markets caught in the currency war rhetoric; stay short CHF
G10 FX markets have been somewhat overshadowed by the sizeable short-squeeze seen in USD/Asia. The JPY was among the winners during the N.American session, although market backdrop could not exactly be described as a risk-off (US equities flat and US Treasury yields higher, with the 10y touching 2.0%). We see markets are somewhat caught in the increasing unsustainability of EM FX gains and the JPY sell-off. Clearly, further JPY declines will inevitably increase the chorus of international rhetoric, suggesting that the currency war theme is unlikely to go away until the G20 finance ministers’ meeting in mid-February. Apart from the JPY, Swiss officials have maintained verbal pressure on the CHF, including recent comments by the SNB’s Chairman and finance/economy ministers. Even after the latest move higher, we believe the correction of CHF’s extreme overvaluation has only just begun (our long-term FEER model puts EURCHF fair value at 1.30). In particular, we note that the heavy deposit flight into CHF continued to build into late 2012 and is yet to unwind to in a meaningful degree. In our view, a sustained breach of 1.2500 could provide a push to a higher level; our current long EURCHF trade recommendation targets an initial move to 1.2800.
– EUR still favoured ahead of ECB commentary and Italy auction
The rally in the EUR continues to draw support on several fronts, including (a) news of a larger LTRO repayment, (b) eurozone officials’ non-activist FX views in sharp contrast to other countries, (c) stronger data recently and (d) strengthening in capital inflows. Wednesday’s bond auctions from Italy (5 and 10Y, EUR 5-6bn) will be a focus this week. In recent weeks, results on Spanish and Italian auctions have been strong and have continued to result in eurozone stress staying low- but not moving lower. We would also monitor the pipeline of ECB speeches this week with Praet and Asmussen (Tues), Nowotny and Weidmann (Wed) and Liikanen and Constancio (Thurs). Our economists forecast a stronger print on the eurozone economic sentiment indicator on Wednesday – the third straight gain in the data series. We still think that the break of 1.3500 level is in the pipeline. Meanwhile, despite the strength in the latest Swedish retail sales data, we maintain a long EURSEK trade recommendation, targeting 8.80.
BNP Paribas