– EUR to consolidate ahead of ECB, Spain auction
EURUSD should continue to consolidate in a lower 1.3450-1.3650 range should political uncertainty in Spain remain, as our economists expect. Given the renewed focus on Spain, Thursday’s Spanish bond auction will be an important litmus test of market sentiment. A stronger auction (like seen in recent weeks) would be needed to see the EUR sustain short-term. On the ECB meeting, we do not believe that the EUR is overvalued at these levels and would not expect any strong commentary from the ECB on the exchange rate itself. Still, the press conference will not provide a bullish catalyst as was the case in January and will probably sound more cautious on several fronts. In the absence of bullish EUR catalysts, some correction in the EUR should not surprise: it has really been a straight 5 big figure move higher in the last week of January. With upward pressure on EUR rates having abated for now with the first LTRO repayment becoming old news, we may have to wait until the second LTRO repayment (end- February) for more support coming through on the yield side. We are less concerned by strong verbal rhetoric from French President Hollande yesterday (governments to play a greater role in euro’s exchange rate policy). We would point out that on a political level itself, the feeling on the EUR is not yet mutual; for e.g, Luxemburg’s FinMin Luc Frieden said he was not concerned over currency levels at the moment. Positioning wise, 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 hurt by weaker data; RBA March rate-cut pricing increases
The disappointing Aussie retail sales print has weighted on AUD with AUDUSD breaking down under the 1.0300 level, and AUDNZD cleanly below 1.2300. Our economists’ expect one more 25bp rate cut in March, with now only 14bps in the price. 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. 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%).
– Earlier BoJ transition spells a weaker JPY
JPY has continued to remain under heavy selling pressure following the announcement that BoJ Governor Shirakawa will be stepping down much earlier (March 19 vs. April 8 originally planned). The main takeaway is we are likely to have a new and revamped BoJ by the April 4 meeting. The market will push the JPY weaker as a result. The immediate focus will be on the likely successor to the Governor. A special diet session is likely to be held around mid-February in which the nominations for the Governorship are revealed, and a final decision seems likely shortly thereafter. The likely candidates are already well flagged: Mutoh, Kuroda and Iwata. The most JPY bearish choice would likely be the Iwata who has beenadvocating a foreign bond buying fund, backed by the BoJ and the MoF. The least bearish would be Mutoh, who has historically been conservative and actually opposed moving to an inflation target during his previous tenure at the BoJ.
BNP Paribas