– Japanese politics may continue to push USDJPY higher, but only for now
Comments by Shinzo Abe, the leader of the opposition LDP party in Japan, is likely to cause investors to remain short JPY positions ahead of the lower house election on December 16. Abe has called for more active monetary easing from the BoJ and suggested the need for a 2-3% inflation target and a weaker value for the yen is required to boost the Japanese economy. While Abe’s comments are likely aimed at maintaining his lead in political polls, the strength of his statements are likely to cause investors to remain short JPY ahead of the election. Indeed, this morning’s price action pushed USDJPY to 80.95 and has triggered the stop on our short USDJPY recommendation at 80.70. Investors are likely to remain bearish yen over the weeks ahead as the LDP’s political rhetoric continues, but other fundamental metrics for USDJPY indicating that upside pressure on USDJPY is likely to be limited. Our favoured US-Japan 2-year yield spread chart continues to signal greater downside risk suggesting that a level around in the high 78s is justified. BNP Paribas STEER also indicates that USDJPY has been overbought. Furthermore, our BNP Paribas FX Positioning indicates that the market is already holding substantial short JPY positions, which may limit scope for aggressive USDJPY selling to take place.
– US data and events support our dovish Fed view
Wednesday’s US economic developments offer further support to our dovish Fed views. October retail sales fell by 0.3% m/m, the first decline in four months. While some negative impact from hurricane Sandy was generally expected, the print was below market expectations but in line with our economists’ forecast. Core retail sales also fell by 0.3% m/m. Overall, the report does little to alter the picture of stable and moderate (but not accelerating) trend in consumer spending. Meanwhile, minutes from the October FOMC minutes said “a number of participants indicated that additional asset purchases would likely be appropriate next year after the conclusion of the maturity-extension program”. This is arguably the clearest signal to date that policymakers are increasingly looking to roll Operation Twist into outright Treasury purchases, in line with our longheld view. EURUSD initially jumped above 1.2770 in reaction to the minutes but subsequently pulled back as US equity markets dipped further. Despite today’s mixed price action, the minutes are clearly USD-negative. We see the December Fed meeting as a potential trigger for the next round of sustained USD weakness, especially if it coincides with a successful resolution to the US fiscal cliff uncertainty and some easing in the Eurozone debt tensions. We continue to target EURUSD at 1.3500 by year-end.
– GBPUSD weakness unlikely to be sustained
Wednesday’s European session has been dominated by UK data flow with a more dovish that expected UK Inflation Report and slightly soft employment data. The BoE’s forecasts in the Inflation Report have not been significantly revised from the report in August – the outlook for inflation in 2-years has been revised higher to 1.8% from 1.7% while growth has been revised slightly lower to 1.9% from 2%. However, GBP is underperforming due to dovish comments from Governor King warning that the “bleak” prospects for the eurozone will slow the required adjustment of the UK economy and a rebound in growth. Nevertheless, we view that the sell-off in the GBP is unlikely to be sustained – on a relative basis the UK, and the outlook for BoE policy action, continues to appear favourable and should be supportive for Sterling. Going forward, we view that a move higher in GBPUSD will be driven by USD weakness. Today’s US retail sales data and FOMC minutes clearly support that view and we continue to see GBPUSD pullbacks as a buying opportunity.
BNP Paribas