-Fiscal Cliff talks pushed back to after Christmas – impasse an opportunity to add to USD shorts
FX markets entered a risk-off tone overnight with US House Speaker Boehner having delayed the vote on tax increases for high-income earners. The USD is bid this morning although EURUSD and GBPUSD remain within their trading ranges of the week. Boehner’s announcement brings the US economy closer to going over the cliff in the New Year with talks not restarting until 27 December, providing only a few days for further discussions. However, while there is nervousness from the apparent set-back in the fiscal-cliff talks, an agreement remains likely by the end of the year. Furthermore, our FX positioning analysis shows that investors are currently running only light risk-on positions due to the lingering uncertainty around the cliff. This in our view limits scope for the market to sell-off. We therefore view that a rebound in the USD over the holiday period provides an opportunity to add to USD shorts. We favour AUDUSD moving higher in the New Year and also expect the CAD and the GBP to benefit from the USD weakness.
– Solid domestic data signals further CAD gains
Canada’s October retail sales printed a gain of 0.7% m/m versus expectations for a 0.2% m/m increase. This suggests a surprisingly resilient consumer and bodes well for today’s October GDP report where we are sticking with our aboveconsensus 0.3% m/m forecast. This should offer some further support for CAD which remains one of our preferred currencies. Commodity currencies have fallen behind European currencies (EUR, GBP and SEK) this week. We suspect this has to do with relatively heavy long positioning as well as volatility in commodity prices. Gold was a big mover again on Thursday, breaking decisively below its 200-day MA of 1661. Looking ahead to 2013, we believe commodity currencies will benefit from the global search for yield as well as strengthening growth trends in the emerging economies.
– USDJPY still overextended
USDJPY has regained some of the ground lost after yesterday’s BoJ policy announcement which produced an ‘as expected’ JPY 10 trn expansion to the BoJ’s balance sheet but no change to the 1% inflation target. That said, BoJ governor Shirakawa stated that policymakers will review inflation goals at the next policy meeting in January. While markets remain biased for USDJPY upside in the near-term, we continue to note that short-JPY positioning remains extreme and technical momentum indicators are overextended, with the daily RSI of around 78 warning of a potential reversal.
– EURGBP vulnerable to moving lower on any rebound in UK data
Thursday’s UK retail sales release was slightly softer than market expectations. Retail sales ex-fuel were up 0.1% m/m in November (+0.4% expected), while October’s release was revised to -0.5% from -0.7%. We expect any GBP weakness off the back of the release to be limited. We expect that GBPUSD can remain supported as the USD remains under pressure on expectations of progress on the fiscal cliff, while EURGBP is at the top of its trading range since May. Our economists highlight that a pick-up in consumer confidence suggests a recovery in retail sales over the months ahead. On Friday the final GDP is releawsed and the next major data releases will be the PMIs in the New Year. We expect any signs of strength in these data to push EURGBP lower.
BNP Paribas