– BoJ just meets consensus – USDJPY at risk of fall
The BoJ expanded its asset purchases by 11 trillion yen ($138 billion) this morning, easing monetary policy for the second straight month. The central bank pledged to pump 91 trillion yen through its asset buying and lending programme, its key monetary easing tool, with 10 trillion yen set aside for buying government bonds. The remaining 1 trillion yen will be for purchases of commercial paper, corporate bonds, ETFs and real estate investment trusts (REITs). As widely expected, it kept its overnight call rate target unchanged at a range of zero to 0.1 percent by a unanimous vote. The measures were consistent with market expectations but did not go further such as raising the inflation target above 1.0%. We implemented a short USDJPY recommendation at 79.65 yesterday targeting our year-end forecast of 77.00 with a stop placed at 80.70 (See FX Strategy Flash: Implementing Short USDJPY – 29 October 2012). We stress that the rally in USDJPY has largely been driven by the rise in US-Japan yield spreads that are now retreating and could fall much further. Additionally, the market is short JPY which creates a vulnerability to an unwind. Our BNP Paribas proprietary positioning indicator shows the JPY to be the most extended short within G10 markets (see chart). The BoJ decision falling short along with a potentially weak US employment report on Friday (a rise in jobless rate) could weigh on spot. Elevated USDJPY risk reversals (included in our positioning indicator) suggests the market remains complacent to downside risks.
– USD to hold modest strength today as weather disruption continues
The general mood in subdued (weather distorted) trading remains one of modest risk-aversion with the USD better bid across all G10 currencies barring SEK which was propped up by better local data. With the peak intensity for Hurricane Sandy due in the next couple of hours and with NY markets shut till Wednesday, the current mood could continue providing the USD with a modest bid. Accordingly, data today could take on secondary importance and a projected pick up in US consumer confidence later today may not have too much of an FX impact. Assuming some sense of normalcy returns on Wednesday (with NY markets potentially opening), fundamental drivers could once again gain more prominence. The key points to highlight this week are NOK (Wednesday’s Norges Bank decision) and GBP (Thursday’s UK PMI) ahead of Friday’s US employment report. Our bias would be for the GBPUSD to recover on better UK PMI and NOKSEK to grind higher on a combination of a slightly more hawkish Norges Bank (relative to Riksbank) and potentially weaker Swedish PMI on Thursday. Beyond these catalysts, risk-sentiment could continue to remain dictated by (a) Uncertainty on Spain and now Greece once again (more below), (b) the impending US election and (c) earnings season which runs till mid-November.
– EUR faces downside risks ahead of November 12 Eurogroup; May present buying opportunity
We maintain our multi-month constructive EUR view but the next fortnight could see some correction as eurozone-related uncertainty increases a notch ahead of the November 12 Eurogroup meeting. On Spain, expectations on the timing of an aid request have already been adjusted forwards to November (from mid-October) following suggestions Germany preferred a Spain aid request to be clubbed with that of Cyprus, Greece and Slovenia. Should these countries seek aid (as reports suggest likely) but Spain continue to hold out, then this could see some slight increase in eurozone stress and a correction in EUR. Still, our bigger picture view is one of EUR holding in better with the capital flows picture improving. Combined with our forecast for USD weakness on Fed QE, EURUSD should ultimately move up to 1.3500 by year-end on EURUSD. The 200-dma (1.2836) will be a key pivot point. Meanwhile, Greece will remain of some focus given recent lack of internal unity to meet Troika demands on labour reform. Our economists expect a resolution to be found by the Nov 12 Eurogroup meeting. Wednesday’s Eurogroup conference call is the next focus.
BNP Paribas