– Japan’s Aso downplays foreign bond buying…JPY weakness stalls
Japan’s finance minister Aso has raised doubts about prospects for Japan to purchase foreign bonds in order to weaken the JPY. The comments have pushed the JPY higher following Monday’s weakness in the wake of Japan escaping direct criticism at the G20 meeting in Moscow. Aso’s comments directly contradict those of PM Abe who has signalled that a joint Japanese fund to purchase foreign bonds in order to weaken the JPY was a goal. The contradictory comments highlight the high stakes here regards the PM fully implementing his aggressive policies known in the markets as “Abenomics”. We are very sympathetic with the concept that JPY weakness is largely driven by strong expectations of the Abe regime delivering on future policies rather than a reflection of significant change in policy to date. Our view remains that JPY weakness will be front loaded into the first half of 2013 but that a lack of new strategic policy will mean that the JPY strengthens again during H2 2013. Our favoured 2-year swap ratio versus USDJPY signals that the currency pair should be trading closer to 87 than the current 93.60. We would refrain from actively going short USDJPY currently given the pending announcement of the new (likely very dovish”) BOJ Governor but today’s developments are an important insight into the politics surround JPY direction in Japan.
– Draghi fails to dent the EUR; German ZEW to remain supportive on Tuesday
We expect the EUR remain supported despite ECB Draghi’s comments to the European parliament that the strength of the euro increases the downside risks from weaker economic activity. These comments are in line with the more dovish tone at the ECB’s latest press conference and should not temper the support for the EUR this week if the eurozone ‘flash’ February PMIs (Thursday), Germany’s February ZEW economic sentiment (Tuesday) and IFO business sentiment (Friday) show further improvements as expected by our economists and the market. Specifically, on Tuesday we expect the expectations component of the ZEW survey to rise to 33.0 and the current assessment to rise to 12.0. Such outcomes would be supportive for the EUR given its current levels. Incoming data is important for the EUR 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 have clearly transpired in recent weeks, at least until there is clear evidence of the EURUSD gaining to new highs (we see 1.40+ as a potential threshold). Beyond the economic data, the looming elections in Italy remain an uncertainty, although we expect newsflow 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 view the pullback as a buying opportunity ahead of improving data and the Italian election. All-in-all, we expect EURUSD to rebound towards 1.3800 by the end of Q1.
– The SEK’s rally appears overstretched according to relative Swap rates
BNP Paribas economists expect an upside surprise to Tuesday’s Sweden CPI release for January. The annual inflation rates should rise to 0.3% y/y for the headline measure (market: 0.0%) and 1.2% for CPIF (market 1.1%). The Riksbank has likley reached the trough of its cutting cycle. Meanwhile, the unemployment rate is expected to move higher on the back of seasonal job cuts. For the SEK, the recent rally since the Riksbank meeting last week is starting to show signs of being overstretched. In particular, the 2 year Swap ratios for EURSEK and NOKSEK indicate that the crosses have been oversold – this indicator for NOKSEK suggests that the cross should be trading around 1.16. Further declines in NOKSEK over the days ahead would therefore represent attractive buying opportunities in our view.
BNP Paribas