– Risk supported as the contours of the fiscal-cliff deal emerge
FX markets are predictably slowing ahead of the year-end holidays, but the outcome of the fiscal cliff negotiations will continue to dominate over last two weeks of the year. The latest negotiations suggest that a more constructive scenario with reports indicating that both sides are considering compromises; concessions over Social Security from Obama and an increase in marginal tax rates by Boehner. While there is a big division yet on quantities (like threshold on income for marginal tax rate increase), the gap between ideologies is narrowing. Given these developments, we think the focus is gradually shifting to securing broader party support for the deal currently being worked out between the negotiators. Concerns over the fiscal cliff have been preventing risk-sentiment from rallying further. Given that expectations are divided on the outcome, the response to news could be balanced with good news becoming bad news for the USD and vice-versa. A resolution should shift the focus back on Fed easing. EURUSD should meet our 1.3300 year-end target.
– SEK rallies after Riksbank; NOK eyes Norges Bank tomorrow
The Riksbank cut by 25bps as widely expected today with the forecast repo-rate profile indicating a more balanced rate profile, with rates remaining lower for longer. Following the decision, SEK strengthened across the board (NOKSEK below 1.1800. EURSEK below 8.75) while Swedish rates (Dec 2013 FRA) backed higher to reflect this more neutral policy rate profile. While this SEK strength could continue in the near term, SEK could become increasingly sensitive to data releases, in particular jobs data (next release 24 January) with the central bank having revised higher their estimates for the jobless rate (8.1% for 2013 vs. 7.9% prior). The next Riksbank meetings are in February followed by April. We continue to strategically favor NOKSEK upside with the Norges Bank likely to enter a tightening cycle in H1 2013. The Norges Bank statement on Wednesday will be in focus. We, along with consensus, expect unchanged rates but the tone of the statement could be slightly hawkish as policy makers remain concerned about rising house prices.
– Less dovish RBA minutes; Stay long AUDUSD
RBA minutes of its 4th December meeting were less dovish than expected and indicated that a rate cut was a close call. While the rationale for cutting on a softer domestic economy (peak in resource investment, weaker labour market) was intact, the statement also acknowledged more positive global conditions and emerging signs of stability in China. With RBA stating that expected effects of prior rate cuts were beginning (and should continue to have) traction, there is less of a sense of urgency to cut rates in the months ahead. Our economists do not expect a rate cut in February, but AUD OIS currently price in further easing (-15bps in February, -25bps by March). The risk is for unwinding of rate cut expectations on the back of improvement in domestic and Chinese data, in favour of AUD gains. We stay long AUDUSD, targeting 1.0850.
– JPY could rebound on an uneventful BoJ on Thursday
USDJPY remains heavy on a “sell the rumour, buy the fact” response following Sunday’s election outcome. Thursday’s Bank of Japan announcement will gain increasing focus following meetings between PM-elect Abe and Governor Shirakawa today. Likely options for the BoJ include another JPY 10trn expansion in the asset purchases (like October). A Nikkei report suggests that the BoJ’s 1% inflation goal may be doubled, but not before the January BoJ meeting which also coincides with an update of the BoJ’s medium-term outlook. Our economists think any such BoJ-Government accord could come only after the BoJ change of leadership in April. Extended short-JPY positioning remains vulnerable to profit-taking if the tone of rhetoric from the LDP soften as we expect.
BNP Paribas