– US Treasury backs Japan, lifting USDJPY to new highs
USDJPY rallied through 94.00 after US Treasury Undersecretary Brainard expressed support for Japan’s efforts to boost growth and end deflation, attempting to diffuse tensions ahead of the G20 meeting which begins Thursday. The comment suggests that the US will support Japan. This is quite similar to prior instances in which the US (and G7) supported and welcomed Japanese measures back in 2000. This is effectively a green light to sell JPY and further upside in USDJPY and EURJPY is likely today. However, while the G7 countries may support Japan, we still think the G20 meeting could be a more tense affair given a lot of EM nations (who have considerable clout at the G20) are still irked by Japanese rhetoric to weaken the JPY. US data later this week could be one factor restraining the JPY sell-off somewhat. We are well below market consensus for the January retail sales report on Wednesday, where we expect a decline of 0.6% m/m (vs. consensus of a 0.1% m/m gain). US data has been flying under the market’s radar lately but a weak print could weigh on US yields (which would be JPY positive). Fed Vice-Chairman Janet Yellen was predictably dovish on Monday, saying that Fed tightening action was “possible but not assured” after the employment threshold was reached.
– EUR outlook still positive
The EUR has been pushing away from last week’s lows with some help from Bundesbank’s Jens Weidmann who said the currency was not overvalued, adding that the role of FX in monetary policy should be considered only via its impact on inflation. These comments are in fact very similar in substance to Mario Draghi’s remarks last week, but the market reaction has been quite different. In our view, markets have overreacted to the latest ECB announcement, which did not constitute a ‘game-changer’ for the EUR. Continuing with the theme of FX comments from Europe, we note the increasingly evident core-periphery split as officials from Germany, Austria, Finland and Luxemburg all tended to play down EUR strength on Monday. Nevertheless, we expect that EUR will continue to trade in a back-and-forth pattern this week given a likely soft Q4 GDP print (Thursday) and on-going political uncertainty in Spain and Italy. Our medium-term bullish target remains unchanged however as we see the pair reaching 1.4000 by Q2. BNP Paribas STEER suggests EURUSD is already looking undervalued (fair value 1.3550, lower corridor 1.3330).
– Re-establishing EURCHF longs
After recently closing out our EURCHF long recommendation, we have re-entered the trade at 1.2305, targeting a move to 1.2800 by the end of Q1. With Swiss officials recently reiterating their commitment to the 1.20 floor, a stop-loss at 1.1970 offers a very attractive risk-reward profile in our view. Today’s Swiss January CPI should fall by 0.3% y/y, highlighting that the current central bank stance is likely to remain in place. Among the main elements of the rationale for the bullish EURCHF views, we see a) a market friendly outcome of the Italian elections that should lead to some renewed bond spread tightening b) a shrinking ECB balance sheet which makes the EUR an unlikely funding currency c) large overvaluation of the CHF on a long-term basis (a FEER model fair value of 1.40 for EURCHF). Additionally, the significant CHF safe-haven deposit flight from last year has yet to unwind to any significant degree. A more sustained reversal of those flows should offer support to EURCHF in the months ahead.
BNP Paribas