– G7 Statement provides green light to sell JPY
USDJPY remains bid and likely to break the 94.46 high reached yesterday after a G7 statement released this morning provided a green light to sell JPY ahead of the G20 meeting beginning Thursday. The G7 clarified that “our fiscal and monetary policies have been and will remain oriented towards meeting our respective domestic objectives using domestic instruments, and that we will not target exchange rates”. This should reinforce the status quo, and the JPY should remain under pressure against USD and EUR. While on the surface this G7 statement suggests that the G20 could be a non-event, we would disagree and think it can remain a tense affair. The G7 has historically tended to back Japan in its policies. However, there are a number of other countries like China, Russia, S.Korea, etc who have an increasing importance in the G20 and are probably not too happy with some of the recent Japanese rhetoric. Accordingly, some volatility in USDJPY may be possible towards the end of the week. 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 1.3525, 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. Swiss officials have recently reiterated their commitment to the 1.20 floor, with SNB President Jordan this morning saying that the central bank will keep applying pressure on the CHF cap “without restrictions”, noting there is no risk of inflation in the near future. Today’s Swiss January CPI showed that deflationary pressures remain strong, with CPI sub-zero for the sixteenth month. 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).
BNP Paribas