– US NFP headline today prone to volatility
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. However, there is considerable uncertainty on the headline in January given the seasonal adjustment made on account of massive layoffs. This factor typically adds 3mn to the unseasonally adjusted print. This means that there is considerable uncertainty on the headline. Today we also will get the back end revisions to past NFP releases (from March 2011-March 2012). Likelihood is there are some upward revisions here. However, beyond any short term reaction, we believe that slower economic growth will drive QE3 policy to run well into 2014, which should keep USD weak. The DXY index broke below the 79.00-79.20 area this morning.
– Weak LTRO figure presents EUR dip buying opportunity
Earlier today, the ECB announced that banks will repay EUR 3.484bn of the 1st LTRO next week, following from the large amount repaid this week (EUR 137.2bn). This was below consensus expectations in the EUR 10-20bn region, and could see some softening in short-dated EUR rates. However, EUR losses will likely remain limited, and offer an opportunity to buy on the dip with the EUR move higher driven by several factors. This includes improvement in the Euro zone data, the shrinkage of the ECB’s balance sheet, and diversification demand from the EM reserve managers, to name a few. We raised our EUR forecast at the end of Q1 to 1.3800 and the Q2 forecast to 1.4000.
– 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.
– Long CADNOK recommendation entered
Yesterday, we recommended establishing a long CADNOK position at 5.4640, targeting a move to 5.7500. Over the past 6 months, there has been a widening of the spread between Canadian oil prices (e.g. Western Canada Select) and WTI/Brent. This spread widening has coincided with CAD under performing NOK. The cross has fallen to very low levels (unseen since Q4-2011). However, recently the oil spreads have begun reversing in favour of Canada driven by the easing in transportation/refinery constraints in Canada and the US. We continue to think this reversal in oil spreads could continue which should see CADNOK reverse higher. Additionally, the cross has already moved well beyond the divergence in the relative swap spreads. Accordingly, we believe there is significant potentially for CADNOK to move higher. The target on the recommendation (5.7500) is based on the current level of the WCS/Brent spread. We put a stop at 5.3500, just under the September 2011 low.
BNP Paribas