– NZD dip provides buying opportunity; FOMC minutes in focus
The past 24 hours have seen idiosyncratic moves in JPY, GBP and NZD. JPY is modestly stronger following comments from PM Abe suggesting less need to set up a fund to buy foreign bonds. GBP has taken another leg lower following the release of BoE minutes which showed a more dovish 6-3 voting pattern (vs. 8-1 previously) as King and Fisher join Miles in voting for GBP 25bn in additional QE. Finally, NZD has been hit hard overnight (-1.15% vs. USD) following comments from RBNZ Governor Wheeler that the central bank could consider intervening in the FX market when the circumstances are right. However, clearly the circumstances are not right with external factors and even domestic policy settings (likely to move tighter, not looser). We think the NZD weakness will be short-lived. BNP Paribas STEER signals that NZDUSD now looks undervalued following the overnight move lower. We enter a long NZDUSD quant trade recommendation at 0.8380 with a 0.8550 target (model-implied fair value), stop-loss at 0.8295. The focus today will be on the FOMC minutes for the January 29 FOMC meeting. The market remembers the more hawkish sounding minutes for the December FOMC meeting (released Jan 3) and will use the release to fine-tune the view on length and duration of QE. We point out that the FOMC minutes represents the views of voters and non-voters (and doves and hawks) alike, thus would not be surprised if the document does not sound dovish. Still, we believe the core of the FOMC continues to remain disappointed by the pace of growth.
– EUR sensitive to Italian election outcome
EUR will continue to be dictated by expectations surrounding the result of the Italian election (due next Monday). The recent re-widening of the Italian-German 10Y sovereign bond spread has to some degree coincided with the move lower in EURUSD. Our working assumption is that a Bersani-Monti coalition is achieved and that ex-PM Berlusconi stays out. However, clearly market nervousness could increase towards the weekend which could restrain the EUR. We view any pullbacks in EURUSD as corrective, with support coming from the November bullish daily trend line currently at 1.3280. We expect EURUSD to move up to 1.3800 by the end of Q1. The eurozone flash’ February PMIs (Thurs) and German IFO (Fri) will also be important. EURGBP remains well supported as the news continues to feed growing expectations for a big shift in UK monetary policy. Today’s BoE minutes were as dovish as they could have been; more members backing QE despite forecasting above –target inflation. The 1.5269 level (2012 low) on GBPUSD and 0.8770 resistance on EURGBP (76.4% retracement of July 2011-12 downtrend) remain key pivot points for Sterling.
– USDJPY range-bound ahead of Abe-Obama meeting on Friday
The JPY is modestly stronger overnight after Japan PM Abe followed Finance minister Aso in raising doubts about prospects for Japan to purchase foreign bonds. This dialled down enthusiasm should be seen in the context of the broader G7/G20 and suggests that there may be a limit to what measures could be put in place to weaken the JPY. This theme should continue up to Friday when PM Abe meets President Obama on Friday. While the topics that are to be discussed are broad based (trade, China, North Korea nuclear threat), currency policy may be a topic behind the scenes with reports suggesting that Nakao (Vice-Finance Minister and the official talking head of Japanese FX policy) will also join. This should keep USDJPY range-bound this week. Meanwhile, news reports suggest that the Muto may be out of the selection list for the next BoJ Governor, with 4 candidates (Kazumasa Iwata, Kikuo Iwata, Haruhiko Kuroda and Takatoshi Itoh) in the running. Recall that Muto was considered the least dovish candidate.
BNP Paribas