– Greek deal to help risk-sentiment remain supported
Both the IMF and Eurozone came to an agreement to reduce Greek debt as was to be expected. While some key details are missing, eurozone banking shares are outperforming in higher volumes this morning. FX-wise, a number of EUR crosses are looking a tad heavy but it appears that FX had rallied in anticipation of a positive piece of news coming from the meeting. We expect that an ultimate release of aid (after formal decision 13 December Eurogroup), an FOMC announcement to expand treasury purchases (December 12) and a solution to the fiscal cliff (postponing fiscal tightening to arrive at deal) should provide positive for risk-sentiment and bearish for the USD. Today, there will be some focus on the US durable goods report, and a weaker reading should see the USD under perform. Although a positive outcome has been pretty much priced into the markets, we expect the EUR to be supported as the deal does remove the tail risk and near-term uncertainty for the EUR. We target EURUSD at 1.33 by year-end.
– SEK under performs on weakening economy; NOKSEK rally has further to go
NOKSEK has recovered about half it’s past week’s decline following sharply weaker leading economic indicators from Sweden. Both consumer confidence (-7.4 vs. -3.5 exp) and economic tendency survey (86.0 vs. 91.5 expected) suggest that the economy is slowing. Sweden has strong trade linkages to Germany and tends to under perform when German growth is softening (See chart). Declining SEK demand on receding eurozone tail risks is also a factor working against SEK. We look for the SEK to under perform both the EUR and NOK. We continue to hold onto our long NOKSEK recommendation (established 17 October) from 1.1675 targeting 1.1940 with a stop at 1.1535.
– Focus on Greek debt buyback ahead of Eurogroup on 13 December
As flagged in the press ahead of time, Greek debt is agreed to be reduced to 124% GDP by 2020 and to below 110% GDP by 2022. The measures used to reduce the debt include reduction of the interest rate and increasing maturity on bilateral loans, deferring interest payments on EFSF loans and the ECB foregoing profits on its Greek SMP bond holdings. The most important component however is a debt buyback programme which is to occur by December 12 a day before the Eurogroup meeting at which a “formal” decision will be reached to make the aid disbursement. Before that, national procedures (like approving changes to aid programme in Germany, Finland, etc) will have to take place.
– Carney nomination is positive for GBP
The appointment of the current Bank of Canada Governor Mark Carney to replace Mervyn King as the next Bank of England Governor caught markets by surprise. It is worth noting that the BoC has been among the most hawkish G10 central banks. Although it is difficult to measure the possible long-term monetary policy and currency implications of this appointment, at the margin it does support our bullish GBP view. We also remain positive on CAD as the next BoC Governor is likely to come from within the bank and is thus unlikely to deviate significantly from the current policy stance.
– Political headlines to influence JPY until 16 December; but USDJPY bias remains lower beyond
The sharp weakening move in the JPY over the past two months has been mainly driven by speculative selling on expectations of an aggressive BoJ easing. This was similar to what was seen after the March 2011 earthquake/tsunami when short JPY positions were built up expectation aggressive BoJ easing and did not prove durable. Ultimately lower US yields as Fed enacts open-ended QE (at the December 12 FOMC meet) should see USDJPY lower once again and we look for opportunities to establish a short USDJPY position. However, until the election on 16 December, JPY could continue to trade weaker as the likelihood of a more easing-focussed LDP election win looks apparent.
BNP Paribas