– EUR consolidation lower to continue in days ahead
The EUR ended last week on a soft note, and relatively thin markets in the Asian time zone (with China, Japan and several countries off) has only seen a small recovery. This week, comments ahead of the G20 Finance and Central Bank Governors meeting (begins Thursday) will dominate headlines. Bundesbank’s Dombret and Weidmann who speak today will probably maintain (as Asmussen did over the weekend) that EUR valuation is not an issue, and that FX should not divert attention from necessary reforms that countries (in eurozone) have to undertake. Still, EUR may continue to consolidate lower with much of the good news having been priced in. Given that (a) EUR rates could continue to move lower with no LTRO repayment excitement and (b) less positive political news from Spain/Italy, there is no clear bullish EUR catalyst near term. Wednesday’s 3Y Italian bond auction may slow down the pace of any EUR correction lower, with these auctions having tended to come in on the strong side. However any further EUR correction would provide an opportunity to enter long EURUSD positions with the medium term positive trend (on improving capital flows picture) clear. We would look for opportunities to buy EURUSD on dips closer to the 1.3230/1.3250 region. Our target remains 1.4000 by Q2.
– Japan likely to come under criticism at G20; Further JPY-short covering possible
Our latest Global FX Plus weekly publication released is titled “G20 Event Risk: Larger than You Think”. The market is placing almost no importance (premium) on the G20 meeting of Finance Ministers and Central Bank Governor, which begins on Thursday in Russia. The assumption is 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 much 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 recent comments from Japanese officials. Finance Minister Aso said Friday “JPY weakened more than intended in (USDJPY) move from 78 to 90” and “pace of JPY weakening has been too fast”. The rhetoric appears to be 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.
– NOKSEK to be weighed by softer Norway CPI, less dovish Riksbank
NOKSEK has been better supported last week, recovering towards 1.1650. However, we would expect this move to run out of steam this week. Swedish data releases have recently been outperforming fairly low expectations, while Norwegian data releases have underperformed expectations, or at best just managed to meet consensus. This relative data surprise dynamic has tended to correlated quite well with NOKSEK, and suggests further downside for the cross in the near term. Norwegian CPI is due today and our economists forecast a weaker reading on core-CPI (0.6% y/y vs. 1.0% consensus, 1.1% y/y). The Riksbank meets on Wednesday and there is no strong consensus on the outcome. Our economists expect no rate cut, but 9/22 economists in a Bloomberg survey forecast a 25bps rate cut. A no change, with a less dovish statement (following recent strength in labour market data) could see the SEK continue to trade stronger. Accordingly, NOKSEK may be biased lower this week.
BNP Paribas