– Earlier BoJ transition spells a weaker JPY
USDJPY uptrend remains strong and the pair reached a high of 94.07. JPY came under heavy selling pressure following the announcement that BoJ Governor Shirakawa will be stepping down much earlier (March 19 vs. April 8 originally planned) along with two deputy governors. The press conference from the outgoing governor was a relative non-event, although he did say that the decision did not result from pressure by the government. The main takeaway is that the timeline has shifted and new policy steps are likely as early at the April 4 BoJ meeting. Candidates for the new governor will be presented in mid-February and our Japanese economists point out that they all support additional easing by to a varying degree. Headlines suggest that it is important for the next BOJ governor to show path to achieve the 2% inflation target. The most JPY bearish choice would likely be the former BoJ deputy Governor Kazumasa Iwata who has been-advocating a foreign bond buying fund, backed by the BoJ and the MoF. Meanwhile, BoJ’s Takehiro Sato mentioned the option of scrapping the 0.1% floor on rates, albeit this requires further discussions. Also, offering funds at lower rates may be considered if BOJ asset buying fails to draw more bids in the future. A less highlighted part of the JPY’s retreat is higher US yields, which have supported the USDJPY move higher (see chart). Hence, we believe much of the JPY weakness will remain front-loaded in the near-term and see an initial move to 95.00 followed by a downward correction later in the year.
– EUR to consolidate amid escalating rhetoric
The EUR has rebounded led by EURJPY’s rally. A flurry of comments from Eurozone officials has been catching the market’s attention too. French President Francois Hollande called for governments to play a greater role in euro’s exchange rate policy, echoing the stance advocated by his predecessors Nicolas Sarkozy and Jacques Chirac. In contrast, Luxemburg’s FinMin Luc Frieden said he was not concerned over currency levels. The largest FX impact probably came from a ‘source’ news report suggesting that the majority on the ECB do not see the euro’s rise as a serious threat to the economy. In our view, the EUR is not overvalued at these levels on a real trade-weighted basis, which appears to be in line with the majority ECB thinking. That said, we believe that the ECB announcement spells downside risks to the EUR as the overall tone (and the market reaction) are likely to be more cautious than at the January announcement. Furthermore, the political uncertainty surrounding Spain could escalate further near term. Our fixed income strategists also highlight the risk that Spanish paper come under some selling pressure after the 15Y Spain auction later this week. This could return EURUSD in the lower end of the 1.3450-1.3650 range. We are flat on the crosses after closing out our long EURCHF and EURSEK recommendations, but would be looking to increase EUR exposure on any sizeable dips in the next 1-2 weeks.
– AUD remains slightly under pressure, spotlight shifts to Aussie employment and Chinese economic data
The disappointing Aussie retail sales print weighed on AUDUSD. Broad-based weakness in Q4 left real retail sales up only 0.1% QoQ (against exp: +0.3%), while sales for December fell 0.2% MoM. Our economists’ expect one more 25bp rate cut in March. Apart from the dovish RBA statement and weaker retail data, we reckon that AUD’s underperformance is largely a function of the buying pressure on the EURAUD cross (the positive 3m correlation between EURUSD and EURAUD is very elevated at 70%). The spotlight shifts to Aussie employment data (tomorrow) as well as the Chinese exports and CPI data (both due on Friday). A rebound in employment data above the negative reading, coupled with acceleration in Chinese exports and imports should lend a helping hand in limiting AUDUSD’s downside. We stay with our long AUDUSD position entered at 1.0390, with a target at1.0850 and stop at 1.0150.
BNP Paribas