– Bullish EUR drivers reinforced further today
There appears to be very little to deter the current EUR rally, with a lower participation in today’s 3m LTRO (EUR 3.7bn vs. 6.2bn maturing) only adding to the move higher in EUR rates. The chart below shows that the EUR 1Y1Y IRS has backed up sharply and close to levels before the LTRO was announced in December 2011. EURUSD broke the 1.3500 ahead of the LTRO result, and has powered above 1.3550 since. On the EUR, there are number of bullish developments to note, including (1) improvement eurozone bond market sentiment, (2) move higher in EUR rates, (3) better eurozone data and (4) eurozone officials not talking down the currency, in stark contrast to officials in other countries. All the above were ticked today with a good Italian auction (5Y, 10Y), the smaller take-up in the 3m LTRO, stronger than expected January eurozone economic sentiment data, and ECB Nowotny noting that the EUR is rising on an improved economic outlook. Moreover, the move higher in EURUSD has without the market having appreciably reacted so far to potentially dovish developments from the US side (more below). Hence, there is plenty of room for the move to extend, in our view. We continue to maintain positive EUR exposure via a long EURCHF recommendation (1.28 target) and long EURSEK (8.80 target). We have decided to raise our stop on long EURSEK from 8.440 to 8.5650 (entry) to protect the position from unexpected strength in Swedish data.
– USD vulnerable to a dovish Fed reminder
Today, the US calendar is pretty heavy. Our US economists expect Q4 GDP growth to slow to 1.3% q/q saar, leaving 2012 growth at 1.9%. The drop in January consumer confidence to the lowest level since November 2011, in our view, foreshadows a slowing in consumer spending and a further growth deceleration in Q1 as the impact of the payrolls tax hike kicks in. The expectation is thus for the Fed to stay the course today with no changes to the policy stance and just a few tweaks to the language of the communiqué. Our economist expect January ADP employment report to print a gain of 150k jobs compared to 215k prior and we expect a similar outcome for the Friday’s non-farm payrolls, along with a pick-up in the jobless rate to 7.9%. This is clearly not the significant and sustained improvement in the labour market trend that the Fed is looking for. We think that any post-December FOMC minutes hopes for an early end to QE3 are likely to dissipate, putting the USD under broader selling pressure. Our bias is for AUDUSD to bounce further from the recent sell-off and we maintain a long trade recommendation with a target of 1.0850.
– GBPUSD should continue to stabilise higher
GBPUSD has continued to show signs of finding a base, with more optimistic comments on growth from usually dovish BoE Miles yesterday providing some support. We continue to maintain that markets have been excessively pessimistic on UK growth as a number of leading indicators suggest momentum should improve. The better money and credit figures today suggest that the BoE’s Funding for Lending scheme (FLS) is beginning to show early signs of having an impact, particularly in the housing sector. The next focal point for Sterling will be BoE Governor-designate Carney’s appearance in front of the UK House of Commons Treasury Committee on Feb 7. The markets have taken note of recent comments from Carney and his willingness to look ‘out of the box’ in terms of more aggressive easing measures. Accordingly, markets will look for a further elaboration of his thoughts on nominal GDP targeting.
BNP Paribas