– G7 Confuses Rather Than Clarifies
The G7 statement and subsequent comments have led to some choppy FX trading – likely the opposite of what policymakers were intending to achieve. The JPY sold off initially after the official G7 statement appeared to reinforce the status quo. Subsequent comments by one G7 official suggested the communique had been misinterpreted and that there was concern about excessive moves in the yen. Meanwhile, UK officials said the G7 was not singling out an individual country or exchange rate. These conflicting comments have led to some confusion in markets with the USDJPY selling off to 93.00 but bouncing back above 93.50, and the USD slipping against the EUR and elsewhere. We suspect that the mixed messages reflect some divergence of opinion behind closed doors, which was not fully reflected in the generic official statement. This also reinforces our view that markets have been too complacent in expecting the G20 to be a non-event. We see a number of other countries like China, Russia, S.Korea, etc who are playing an increasingly important role in the G20 and have some discomfort with aggressive monetary expansion in the major economies in general, and Japan’s FX rhetoric in particular. Accordingly, we expect more USDJPY volatility in the 92.50-94.50 range into the end of the week.
– US data should be a bearish reminder for the USD
EURUSD has moved above 1.3400 as the post-ECB impact gradually faded. Comments from ECB President Mario Draghi were similar in contents to his statement last week although he did appear to have some strong words for the recent EUR chatter; he referred to those comments as “inappropriate” and “fruitless”. Germany’s finance minister also weighed in on FX matters downplaying EUR concerns, which was generally in line with the stance taken by speakers from the core Eurozone economies this week. For today, we see the focus shifting somewhat from EUR-specific developments to the US side of the equation. Our US economists are looking for a very disappointing US January retail sales report to show 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 recent comments from Fed Vice-Chairman Janet Yellen acts as a reminder that QE3 remains data dependent. A weaker print today could offer a boost to EURUSD; we maintain our medium-term bullish target at 1.4000 by Q2. For commodity currencies, soft US numbers could prompt a mixed reaction, but we would prefer to fade any risk aversion reaction in AUD and CAD. For the AUD, we see scope for a rebound above 1.0350, which would be a bullish signal in our view. Meanwhile, President Obama’s annual state of the union address was focused on deficit reduction, but he there was no new proposal hence there was muted market reaction to the speech.
– Central banks in focus in the UK and Sweden
The Bank of England inflation reports is due today. Our economists suggest that the main risk is that the inflation projection for 2y ahead is at or slightly above the 2% inflation target, in line with the unexpected BoE statement last week that mentioned upside risks to the CPI. Although the immediate take is that higher inflation could restrain any future BoE easing, in light of the incoming Governor Mark Carney’s comments, this could imply a shift to a more flexible inflation targeting mandate for the BoE. Overall, this is unlikely to reverse the EURGBP’s upside momentum, while GBPUSD should get a lift from softer US data. Our STEER model suggests GBPUSD still attractive; fair value at 1.5900. In Sweden, the Riksbank meets while expectations are somewhat split. 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 could fall towards the recent low of 1.1514.
BNP Paribas