- EURUSD – living on borrowed time above $1.30?
Today, the sharp sell-off seen in EZ bond markets has calmed down for no obvious reason, strongly suggestive that the ECB may be in via the SMP to calm the market. A timely reminder from ECB Couere today that the ECB SMP – which hasn’t been used for a while- “still exists” play to this view. However, underlying investor sentiment could remain shaky with continuing concern on weaker growth (Spain IP contracted at a faster pace in Feb) and thus the ability to fiscally consolidate. Thus while EUR/G3 crosses could hold in better today, it seems only a matter of time before weakness returns. We reiterate our call for a lower EURUSD, targeting 1.28. Looking ahead, investor sentiment will remain key and we would focus on debt auctions as a litmus test- we have another Spain auction on April 19. IN terms of US market events, the Fed’s Beige Book (19:00 London) may bear closer than usual scrutiny as we head towards the April 24-25 FOMC meeting. Also, we have a speech from Fed Vice-Chair Yellen at 00:15 London (topic “The economic outlook and monetary policy). Yellen has a very similar view as Bernanke and should sound dovish. However, it might be difficult for dovish comments to pacify the market and remove support from the USD for now.
- Bias is for JPY strength in days ahead
The yen has continued to outperform as risk aversion, lower US yields and extended spec JPY-short positioning work to lower USDJPY. EURJPY seems particularly at risk of further losses with 2-year German yields dropping below equivalent JGB yields for the first time (see chart). Reports this morning suggest that further easing will be discussed at the second BoJ meeting of the month on April 27. Meanwhile, FinMin Azumi’s comment on FX that “he won’t be swayed by every move in the yen market” suggest that the prospect for intervention in the days ahead could be minimal, even though we may at least get more verbal intervention as we approach the Y80 level. Tensions on the Korean peninsula are another factor worth monitoring going forward: South Korea polls today are being conducted under the spectre of a missile test from the North over the coming days; and there has been some speculation of a subsequent nuclear test. Risk aversion typically sends the yen stronger, but previous episodes of North Korean belligerence have had the opposite effect given geographic proximity and the prickliness of Japan-DPRK relations. So while we do expect to see EURJPY lower, with USDJPY falling further (our
BNP Steer model suggests Y79-80) EURUSD may be the safer ‘G3’ short at present.
- Commodity currencies under the cosh – but with AUDNZD lower
Commodity currencies’ weakness has been compounded by a warning from the IMF that commodity exporters may be in for a downturn given weak global activity. A WSJ report stating that the IMF is about to revise down its estimates for future China C/A surplus (down to 5% from 7%) suggests that it may become harder for the IMF to deem the CNY as being significantly undervalued. Should this further support the current market belief that Chinese authorities have now stopped the latest phase of CNY appreciation; this could inhibit an prompt recovery in the commodity bloc. While we continue to like commodity currencies higher longer term, we would closely monitor any such developments which could further colour the view. Interestingly, FX option markets display few signs of an impending collapse in support, with front-end implied volatility in AUDUSD only marginally off the lows – despite a much higher VIX. However, within the commodity block, the NZD has continued to stand out further helped today by a stronger NZIER Business Opinion Survey (on a recovery in sentiment in the earthquake-hit Christchurch region). We continue to remain short AUDNZD (from 1.2900 established 8 March) and would consider taking profits closer to our 1.2500 target.
BNP Paribas