– Expect more of the same from the US NFP; we raise our EURUSD target to 1.40
The latest FX market moves have been impacted by month-end flows, with the overall bias for a weaker USD (except vs. JPY). US economic data continues to be a mixed bag as softer jobless claims were offset by the stronger January Chicago PMI data. We expect more of the same from today’s January non-farm payrolls, with employment rising by 150k but higher participation rate pushing the jobless rate to 7.9%, while hourly earnings soften. The takeaway is likely to be similar to the FOMC and the Q4 GDP report earlier this week – current QE3 policy will continue in the absence of a clear improvement in the economic outlook. Adding the positive EUR-specific factors (improvement in the Eurozone data, the shrinkage of the ECB’s balance sheet, diversification demand from the EM reserve managers) we believe the recent rise in the EUR can extend further. We have thus raised our end-Q1 forecast to 1.38 and the Q2 forecast to 1.40. Note too, the ECB will announce today how much banks intend to repay LTRO next week. After the large amount repaid this week (EUR 137.2bn), the upcoming repayments are expected to be smaller (EUR 20-30bn max), but is unlikely to affect the current EURUSD rally. We believe FX moves will become less EUR-centric going forward, so that there is scope for a catch-up in the recent laggards such as the GBP and the commodity currencies such as NZD, and to smaller extent, the AUD given the caution ahead of next week’s RBA meeting. AUDUSD dipped today as Chinese manufacturing PMI printed slightly below consensus at 50.4 (vs. exp 51.0) dragged by seasonal fall in production and employment, albeit new orders picked up modestly by 0.4 points to 51.6. Meanwhile, the DXY index remains in important technical territory and a break of 79.00- 79.20 area should signal further downside.
– More USDJPY upside in the months ahead
USDJPY broke to new highs, breaching 91.50 in what appears to be a technically rather than news-driven market. The JPY downward momentum remains strong and we have revised our JPY forecasts lower, on recognition that the Abe government is likely to be able to deliver strong fiscal and monetary expansion, as well as currency depreciation. We still believe much of the JPY weakness will be front- loaded (end-Q1 forecast of 95.00) and the shift in focus to the Fed will bring about an upward JPY correction in Q2-Q4, followed by a renewed downtrend in 2014. To an extent, USDJPY remains divorced from interest rate differentials, although there has been some catch up due to resilience in the US yields, where the 10y near the key 2% threshold. One risk point for USDJPY in the weeks ahead is the potential response from other countries via the G20 forum as concerns over Japan’s policies were heard from officials in the Eurozone and Russia.
– Fade the oil price divergence via a CADNOK long
Since the start of the year, USDCAD has shown an apparent disconnect with oil prices, hence gains in the crude benchmarks did little to support CAD. This is largely explained by the widening of the spread between Canadian oil prices such as Western Canada Select (WCS) and WTI/Brent. The CADNOK cross has been tracking that divergence particularly well in recent months, falling to a 1y low. Oil spreads have started to tighten in recent weeks along with the easing in transportation/refinery constraints in Canada and the US, which in our view offers scope for a recovery in CADNOK over the next 3 month. Moreover, the cross has already moved well beyond the divergence in the Canadian and Norwegian monetary policy outlooks. Finally, we see scope for Canadian data to improve; Nov GDP printed a firmer than expected 0.3% m/m gain, which should be consistent with the BOC expectation for Q4 growth pace to pick up over Q3.Consequently, we recommend establishing a long CADNOK position at 5.4640, targeting a move to 5.7500, consistent with the current level of the WCS/Brent spread. We put a stop at 5.3500, just under the September 2011 low.
BNP Paribas