– ECB unlikely to derail positive EUR sentiment
The positive euro sentiment in place since early November has been reduced slightly; some key EUR crosses are sitting on key support at this time (e.g. EURGBP just above 0.8110/12, EURUSD above 1.3035, channel base from mid-November). This appears linked to Tuesday’s slightly weaker Spain auction and position-squaring ahead of today’s ECB meeting. Our economists believe that the economic assessment is likely to be similar to the one from the November meeting, while the new staff projections should reinforce the message of a gradual recovery. However, even if the forecasts sound slightly dovish on rates, we think a recent reiteration of Draghi press-conference message (that the OMT remains in place but ball remains in the politicians’ court, etc) will be sufficient to support EUR. The chart below shows that, for the most part, the reduction in euro zone stress has been the dominant EUR bullish factor (over and above yield advantage) in recent months. We see no reason for this dynamic to change. Accordingly, any dips should be limited. Elsewhere, the Bank of England should be a non-event for GBP, but CHF could continue to remain under pressure in the weeks ahead as euro zone stress further abates. The weaker reading on Swiss November CPI this morning (-0.4% y/y vs. 0.0% consensus) only underlines our view that the 1.2000 floor will remain in place well into next year with inflation no threat. We target 1.2500 in 2013.
– RBNZ gives wings to the kiwi, Better Aussie employment to help AUD
The RBNZ left the OCR unchanged at 2.50%, as expected, but the statement was hawkish. The statement note several positive hints on the economic outlook, notably the expectation of strengthening domestic demand, a less threatening global backdrop and a more positive China outlook. Although NZD was noted as a headwind to the economy, but the Governor said that criteria for FX intervention were not met. The governor also reiterates that he expects rates to remain unchanged until 2014. NZDUSD rallied post-announcement, opening the 0.8310 (previous high) technical level; we stay bullish, targeting a gain to 0.8400 by year-end. In Australia, November’s solid employment report (+13.9k) against expectations for a flat reading, provided a boost to the AUD as rate cut expectation was scaled back. The next key inputs will be the monthly Chinese data and the FOMC (Dec 9 and 12 resp.). Our long AUDUSD recommendation targeting 1.0850 remains
– JPY vulnerable on pre-election rhetoric
USDJPY rallied on a Nikkei report citing a nationwide survey of voters that showed the opposition LDP is likely to win more than half of the seats in the lower house at the December 16 elections, while Prime Minister Noda’s DPJ may emerge with less than half of the seats currently held. Further evidence of the LDP’s likely return to power remains supportive of USDJPY given its leader Shinzo Abe’s aggressive rhetoric on the BoJ policy. This should lead to more bearish JPY positioning ahead of the December 16 election but we expect that a disappointment on the day, coming after a dovish FOMC (December 12) should see USDJPY retreat lower. We target 76.00 in three months’ time.
– Latest fiscal-cliff gyrations offer hints of compromise; we remain short USD
In the latest twist to the fiscal cliff saga, around 40 House Republicans reportedly signed a letter calling for the exploration of “all options” on taxes and entitlement programs. One Republican lawmaker said he could accept higher taxes above a 500K income threshold, the clearest sign so far that Republican lawmakers are likely to show some bargaining flexibility and the number of ‘defectors’ is large enough to have the potential deal pass through the House. This is consistent with our view that a compromise will be reached, possibly even before the official December 31 deadline. On the data front, we maintain our below-consensus 25K forecast for the Nov payrolls report, despite a 118K rise in the ADP private sector employment survey. We remain comfortable with a short USD bias over the weeks ahead.
BNP Paribas