– JPY under pressure with current BoJ Governor to exit earlier
The mood has improved in the European session following stronger readings on euro zone (and UK) service PMIs. The EUR has recovered, but the biggest move has been in JPY which has come under heavy selling pressure following the announcement that BoJ Governor Shirakawa will be stepping down much earlier (March 19 vs. April 8 originally decided). Shirakawa will be holding a press conference at 13:00 GMT today. While we like EUR higher multi-week/month, we think that there is more downside in the days ahead with Thursday’s Spain auctions and ECB press conference unlikely to help. Today, ISM non-manufacturing index will be released for January with our economists expecting very little change. Comments from Governor Shirakawa and speculation regarding the selection of the next BoJ Governor will likely dominate for today’s session, putting the JPY under further pressure.
– EUR correction likely has further to go near term
We like the EUR longer term and advocate buying dips in the next 1-2 weeks as there is a lot of pent up demand from the investor community (including reserve managers) to increase exposure. However, the EUR correction lower may have further legs in the days ahead. This is because the catalysts in the days ahead could come on a slightly negative side. The political uncertainty surrounding Spain will only escalate further near term (Spain PM Rajoy yesterday admitted some allegations were true). Thursday’s Spain bond auction and ECB meeting may not be supportive for the EUR. Our fixed income strategists highlight the risk Spanish paper come under some selling pressure given Spanish banks have repaid significantly more of the 3Y LTRO than their peers. The risk is the 15Y Spain auction does not emulate the success seen in the Italian 15Y auction last month. At Thursday’s ECB press conference, we would expect Mario Draghi to err on the side of caution in response to questions surrounding the tightening in the eurozone liquidity conditions, the EUR and the situation surrounding Cyprus. Our long EURCHF and EURSEK recommendations were closed at a 2% profit and at breakeven respectively. However, we would be looking to increase EUR exposure on any sizeable dips in the next 1-2 weeks.
– RBA statement more dovish; GBP should recover further
The RBA kept rates unchanged but the tone of the statement was pretty dovish, and this has seen the market move in to price in the prospect of rate cuts in the months ahead (12bps for 6 March meeting, 20bps for 3 April and 29bps for 8 May). The RBA left the door open to cut – stating that that inflation allows scope to ease further if necessary. However, in light of likely better data from both Australia and China in the days ahead, AUDNZD may actually recover further from long term channel support at 1.2265. Stronger Australia retail sales data (Wednesday), employment data (Thursday) and Chinese trade/ loan figures (Friday) could help further. From the UK, January services PMI came in stronger, recovering to 51.50 from 48.9 – the highest since September 2012. This week, the markets will be focussed on incoming Governor Mark Carney’s address to the Treasury Select Committee on Thursday morning. Markets reacted to Mr.Carney’s earlier comments highlighting the scope for further central bank action. But in the absence of a particularly strong message on the possible policy shifts (e.g. nominal GDP targeting) GBP may actually have scope to recover further. GBP is undervalued according to our STEER short-term valuation model, which suggests a GBPUSD fair value around 1.6050 and EURGBP below 0.8450.
BNP Paribas