– EUR to consolidate lower, but not because of Draghi
The EUR has been under pressure after the ECB announcement. As the market increased its confidence ahead of the meeting that Draghi may not mention the EUR as a factor at all, the initial reaction has been a shock factor, which has seen EUR lower. But we would argue that the linking of a higher EUR with increased downside inflation risks (in the ECB statement) is quite a mild form of verbal intervention in the bigger scheme of things. He did also say (a) higher EUR reflects an improvement in conditions e.g. less financial fragmentation and (b) EUR is in line with long term average on real basis. But our point is that the EUR may still continue to consolidate lower with most of the “good news” priced in. Given there will be (a) no LTRO repayment excitement and spike higher in EUR rates and (b) less positive political news from Spain/Italy in the next two weeks, there isn’t really much to sustain an uber EUR bullish view near term. EURGBP and EURJPY could be especially vulnerable ahead of the G20 meeting next week (we believe it is under-priced as an event riskmore below). One (but not the only) reason EURGBP and EURJPY have seen a powerful rally in the past two months is the current assumption on FX for G10 i.e. Japan and the UK do a lot to stimulate monetary policy (JPY and GBP sharply lower) as the eurozone does the opposite (EUR higher). This assumption will be tested next week and could add to further tactical EUR downside. But the medium term positive EUR view (on improving capital flows picture) is clear. We would look for opportunities to buy EURUSD on sizeable dips in the next few weeks. Our target remains 1.4000 by Q2.
– Japan nervous ahead of next week’s G20; JPY-shorts under some pressure
Our Global FX Plus weekly publication released yesterday is titled “G20 Event Risk: Larger than You Think”. The market is placing almost no importance (premium) on the G20, assuming that it will be a non-event for FX as has been the case for the past two years. We believe the market is complacent, and that there could be immense pressure (more from EM nations, less so from G7) to address the risk of competitive devaluation, and the recent rhetoric used by Japan to engineer a weaker JPY. The tension is already visible in comments from Japanese officials. Finance Minister Aso said today “JPY weakened more than intended in (USDJPY) move from 78 to 90” and “pace of JPY weakening has been too fast”. They appear to be trying to pacify criticism ahead of the G20 meeting at the end of next week. But we would argue that given this change in currency policy has only come in over the past two weeks, a little too late. Further nervousness could see short covering in JPY continue heading into the G20 meeting as we will likely hear more rhetoric from policy makers on FX.
– Asian currencies under pressure even as Chinese data point to green shoots
Asian currencies have hurt in recent weeks. Some further position adjustment is taking place today with USDTWD in particular having continued to accelerate higher. Partly, this appears linked to profit-taking on positions with several Asian countries being on holidays for most of next week. However, our Asian strategists think that Asian currencies could trade weaker for much of Q1 on account of global asset allocations shifts. A number of currencies (KRW, SGD, MYR and TWD) are expected to be weaker. They also think that higher CNY fixings could become a feature more from Q2 onwards, but is likely to remain stagnant in the weeks ahead. But in the background, there are further signs of green shoots from China. Trade and loan figures were quite decent for January, in particular the credit figures, with new CNY loans more than double that seen in December. China’s trade figures look more modest when adjusted statistically, but are still strong (exports up 14.1% y/y, imports 3.4%). Our economists note that forward looking surveys flag further strength in exports.
BNP Paribas