– Post-G20, our bias remains to sell JPY rallies
The G20 statement over the weekend has avoided singling out Japan regards currency devaluation or manipulation. The statement pledged that G20 members would “refrain from competitive devaluation”. We note that JPY has strengthened over the recent days on concern Japan could be chastised. The failure to single out Japan suggests the recent strength should unwind, especially as markets’ spotlight shift back to following the race to the bottom among central banks. Some reports have suggested that the front-runner for the BoJ job is the ex-Deputy Governor Toshiro Muto. He is probably the least dovish among the leading candidates and has previously supported a balanced approach to easing, while he does not appear in favour of the radical measures such as foreign bond purchases. If this is confirmed this week, there could be some scope for a modest JPY bounce. But, we doubt that this will be a game-changer given that political pressures on the BoJ are unlikely to subside any time soon. USDJPY at 95.00 remains our target on the upside. Gains above that level will depend on the outlook for the Fed’s QE3, where we still believe that hopes for an early end to easing are largely unjustified. Although Michigan consumer sentiment bounced in February, equities ended last week on a soft note as Wal-Mart reported the weakest start to a month in seven years. This week should bring a pullback in housing starts while the FOMC minutes (Wednesday) should support our view that the Fed is likely to scale back the pace of its balance sheet expansion only slowly, and probably not until 2014.
– Eurozone data a moment of truth for EUR
EURUSD has been trading with a more defensive tone, slipping towards but bouncing off support just above 1.3300. This data-packed week is likely to be a critical test of the EUR’s resilience. The eurozone ‘flash’ February PMIs (Thursday), Germany’s February ZEW economic sentiment (Tuesday) and IFO business sentiment (Friday) should show further improvement and will all be watched closely. The survey indicators have been rebounding since October, albeit from a very weak base as the poor Q4 GDP data has highlighted. For the EUR, incoming data is important for at least two reasons. First, the improvement in the financial markets seen over the past several months has stalled and is, in any case, already priced in (see chart). Therefore, further EUR gains will likely require an improvement in the growth outlook. Second, the broader picture will be relevant to whether the ECB reacts to a stronger currency. Stronger data would probably ease some of the concerns that clearly transpired at the February policy announcement; at least until there is clear evidence of the EURUSD gaining to new highs (we see 1.40+ as a potential threshold). Comments from Bundesbank’s Weidmann who said that the exchange rate is one factor among many in impacting inflation and that the ECB will not justify a monetary policy decision with one single factor support that notion. Economic data aside, the looming elections in Italy remain a clear risk, although we expect things to be relatively quiet on that front this week given the pre-election poll blackout. Our stance is that EURSUD pullbacks remain corrective and temporary. We would thus look for buying opportunities around the November daily trendline support (currently at 1.3265), targeting a gain to 1.3800 by the end of Q1.
– IMM positioning shows a large fall in AUD longs
The latest IMM speculative positioning data (for w/e Feb 12) shows net USD shorts scaled back further, now to near neutral levels. AUD was a large mover, with net longs down from around 81k contracts to 45k, the lowest level since early November. EUR net longs fell somewhat and are still at moderate levels relative to recent history. There was also some further scaling back in JPY shorts to 61K contracts, the lowest since November. There were relatively few changes to the net longs in the CHF, CAD and NZD.
BNP Paribas