– Scope for further USDJPY upside as G20 statement does not stand in the way the recent rally
One of the main points from the G20 statement issued this weekend was that it avoided singling out Japan for weakening its currency, while members pledged that they would “refrain from competitive devaluation”. We expect that USDJPY can continue to move higher and the next focus for the yen will be the announcement of the new BoJ Governor, with reports suggesting that the current front-runner for the BoJ job is the ex-Deputy Governor Toshiro Muto. He is probably the least dovish among the leading candidates as in the past supported a balanced approach to easing while not being in favour of the more radical measures such as foreign bond purchases. Nevertheless, Muto is likely more dovish that outgoing BoJ Governor Shirakawa and monetary policy in Japan is likely to remain targeted at reducing deflationary pressures in line with PM Abe’s new regime. USDJPY is therefore likely to remain supported and we expect 95.00 to be reached over the months ahead. Gains above that level will depend on the outlook for the Fed’s QE3, but we view that hopes for an early end to easing are largely unjustified given a slow pace of job creation in the US. Accordingly, we view that the USD has been overbought against the JPY, EUR, GBP and commodity currencies.
– Eurozone survey data to support the EUR this week
EURUSD has been trading with a more defensive tone recently, slipping towards but bouncing off support just above 1.3300. The data-packed week ahead 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) are likely to show further improvements. The survey indicators have been rebounding since October, albeit from a very weak base as the poor Q4 GDP data clearly 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. 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. Outside of economic data, 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 EURUSD pullbacks remain corrective and temporary. We would view the current pullback as a buying opportunity ahead of the Italian election and expect EURUSD to rebound towards 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. The AUD was a large mover, with net longs down from around 81k contracts to 45k, the lowest level since early Nov. 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. The IMM data is in line with BNP Paribas FX Positioning Analysis which currently indicates that positioning across G10 is currently around “neutral” levels with no extreme positioning. We view that this provides scope for several crosses to rebound, in particular AUDUSD, GBPUSD and the CAD vs the USD.
BNP Paribas