- EURUSD posts two-week high, but eases as elections weigh
Confirmation from the G20 gathering on Friday that additional IMF funding commitments amounted to some $430bn may or may not have contributed to the firmer EURUSD rate, including the push up through 1.3200 and to the pair’s best levels since April 4. In truth, a successful hunt for stops above the figure may have been just as influential. But the EUR’s rise has been tempered by election risk over the weekend. The strong showing by the far-right National Front in the first round of French elections appears to complicate the task of President Sarkozy in trying to appeal both to those buying in to the anti-EUR rhetoric of the NF, while simultaneously courting the votes of undecided centrist voters. Meanwhile, opposition to austerity measures and to further support for the Eurozone periphery has led to the failure of Dutch budget talks and looks likely to result in a snap elections – a decision is expected as early as today. Ahead of any such decision, the ‘flash’ Eurozone PMIs will be the prime focus on Monday morning. The PMI data through March is consistent with the mild contraction in Eurozone GDP we are currently forecasting, and while a small recovery is expected for April (BNP Paribas 49.5 from 49.1 for the ‘composite’ reading) this will still be consistent with a mildly contracting economy. Yet barring a significant fall, thoughts of further ECB accommodation heading into the May meeting will remain limited. Meanwhile, the stronger UK retail sales report ensured that sterling has held on to gains against the USD, even if it has failed to do so against a resurgent EUR. We look to a weaker Wednesday’s Q1 UK GDP report to provide good trade location for a strategic EURGBP short (as outlined in our latest FX Weekly).
- JPY market focus on potential for further BoJ easing, but FOMC may be the bigger mover
After putting in the weakest performance over the past week, JPY has regained some of the lost ground as stale shorts were trimmed, and in the face of pre-holiday offers from Japanese exporters. The domestic highlight for the week will be the BoJ’s two-day meeting concluding on Friday. Last week’s losses were driven in large part by increased confidence that the BoJ will announce some further easing measures, and we regard a Y5tn increase in the asset purchase programme as now discounted. But comments over the weekend from Governor Shirakawa once again stressed the limits of monetary policy, assigning at least part of the blame for persistent deflation on reduced consumption as a result of concern about long-term public finances. The risks appear skewed towards disappointment rather than over-delivery from the central bank. But while markets debate the outcome of central bank reluctance to print vs political inertia on reform, the greater driver of USDJPY this week may prove to be Wednesday’s FOMC and the ensuing Bernanke press conference. Here, too, our rates strategists see the risks as being skewed towards disappointment of dovish expectations, with a lack of a clear move toward imminent additional stimulus, and new economic forecasts that could potentially be misconstrued as being more hawkish. Add to that heavy supply in 2y, 5y and 7y Treasury auctions, and they favour turning bearish USD rates ahead of the FOMC – suggesting in turn that USDJPY is likely to test the exporter offers at 82 before the BoJ meets.
- Better from the HSBC China PMI, but PPI data weighs on AUD ahead of tomorrow’s key CPI
The HSBC ‘flash’ China PMI at 49.1 showed an improvement from the March 48.3 print, but after the big disconnect between this and the official version (53.1) interest has been muted. Focus for the AUD remains on tomorrow’s CPI print, which the RBA has signalled will be the major determinant of the rate decision in early May. Q1 headline PPI inflation
came in well below expectations this morning, and our economists see this as having little implication for the RBA’s favoured trimmed mean and weighted median measures of inflation, the print does suggest that near-term price-chain pressures are contained. Meanwhile New Zealand PM Key lamented the overvalued Kiwi Dollar, although he forcefully
rejected any notion of intervention in currency markets. We continue to favour CAD over either AUD or NZD at present and re-iterate our short NZDCAD view, a position entered into at 0.8100 on Thursday, targeting 0.7800 in coming weeks.
BNP Paribas