– EUR optimism dashed for now, look to Monday
The first headline read that Euro Finance ministers had reached a decision on Greece. This was immediately contradicted by German Finance Minster Schaeuble that there was, in fact, no agreement and they will reconvene on Monday, November 26. This marked the range in the EUR from 1.2820 to 1.2736. In the follow-up remarks, EU president Junker said that they were “close to an agreement, but technical verifications have to be undertaken” and there “are no major political disagreements’. Among the main measures under consideration include using EUR 10bn to buy back bonds at between 30 and 35 cents in the euro. There were also proposals to reduce the interest rate on loans already extended by euro zone countries to Greece from 1.5% to just 0.25% (but Germany opposed such a step), or to impose a moratorium on interest payments on the EUR 130bn loans and lengthen the maturities on loans. It looks like the stage is set for a headline chop-fest into the weekend. Watch downside support for EURUSD at 1.2655, its 100-day MA.
– Politics to drive near-term USDJPY moves
Japan posted a JPY 549bn trade deficit in October, weaker than forecast for a -JPY 360bn gap. Exports growth fell 6.5% YoY (forecast: -4.9% YoY), the fifth month consecutive fall, driven by the sharp drop in shipments to China (-11.6% YoY). USDJPY was bid to following the release, as the weaker external growth outlook puts pressure on the BOJ to do more aggressive easing after the elections. But we emphasize that previous BOJ asset purchases has not weakened the JPY. The focus now turns to politics in the near-term. We think that while political headlines could keep USDJPY supported going into the December 16 elections, the rise in USDJPY will not be sustainable. The Fed is set to ease in December and LDP-reflationary policies are likely to be less aggressive than fear. Relative yields also suggest that USDJPY should trade lower. We look for opportunities to fade sharp upmove in USDJPY.
– Bernanke comments suggest the Fed will stay aggressive
Fed Chairman Ben Bernanke’s comments overnight reiterated the key message from the September FOMC meeting, namely that in the absence of a “substantial” improvement in the labor market the Fed believes it is necessary to continue expanding its balance sheet. We maintain our call that the expiration of Operation Twist in December would prompt the Fed to shift to outright Treasury purchases of about USD 85bn per month from January 2013. Although the Chairman did not mention the amount explicitly, comments from other Fed policymakers over the past week are pretty much consistent with our view. Fed Bernanke also delivered a warning on the fiscal cliff, saying it would pose a “substantial threat” to the US recovery. We remain bearish the USD in the medium term as a further USD 1.2-1.7 tn increase in the Fed’s balance sheet is likely to weigh on the USD in the coming quarters.
– Norway the outperformer in Europe, NOKSEK to continue to head higher
Norway’s Mainland GDP release was in line with expectations yesterday, with an upside surprise to the Q3 release (0.7% q/q vs 0.5%) and downward revision to GBP growth in Q2 to 0.8% (from 1%). Total GDP contracted in Q3 but this measure is can become distorted by oil and shipping production. All-in-all, Norway continues to stand out as an outperformer in Europe and the case is for the Norges bank raising rates in H1 ’13 is building. We maintain our long NOKSEK recommendation as we expect Swedish data to remain weak and trigger a rate cut by the Riksbank in December. A near-term breach of the previous high at 1.1797 NOKSEK should open the path to our target of 1.1940.
BNP Paribas