– AUD benefits from the strong Chinese trade prints; stay long
Risk sentiment has been lifted by the impressive set of China trade prints which revealed that both exports and imports grew significantly more than expected while trade surplus widened to USD31.62bn (against expectations of USD 20bn) in December from USD19.6bn prior. Exports surged by 14.1% YoY against expectations for a 5.0% rise following a 2.9% prior reading while imports rose 6.0% YoY against expectations for a 3.5% rise. The China custom’s spokesperson Zheng commented that exports shows signs of “warming up” in Q1. AUDUSD bounced by 50 pips post-release to 1.0550. China’s influence on Australia’s economy remains strong, evident from the paring of rate cuts priced in by the AUD OIS to 34% chance post-strong Chinese data from 40% yesterday. In addition, we think that the trend of stronger CNY fixing (USDCNY fix at 6.27930 today, below 6.2800 support) should lend support to a stronger AUD. The chart below compares AUDUSD against the Hang Seng China Enterprises index. We note that there is room for AUDUSD to play catch-up, having lagged the rally seen in broader China sentiment since December. Today’s trade data supports the Chinese recovery story, while the spotlight shifts to the CPI data tomorrow and next week’s retail sales, FAI and industrial production data for further confirmation. We stay with our long AUDUSD trade, targeting 1.0850.
– ECB to hold steady, EURUSD to remain supported
EURUSD remains range-bound as dips towards 1.30 continue to find buyers and the pair is struggling to breach 1.31. The ECB meeting will likely shape sentiment for the EUR, but we doubt that it will by itself trigger significant directional moves. Recent economic numbers have been mixed, with ‘hard data’ softer (German factory orders and industrial production) but the forward-looking survey data improving (eurozone economic sentiment and PMIs). We see no change in ECB rates at today’s meeting (70% probability), which is consistent with market expectations. The focus will thus be on pressconference where but we woukd not be surprised to hear that there continues to be a discussion of rate cuts. However, without a clear signal that the ECB was closer to pulling the trigger this month than in December, we believe negative impact on EURUSD should be limited, and our bias would be to use any dips to buy into the EURUSD. Our fixed income strategists’ believe the auctions from Spain tofay and Italy (Friday) may slow (but not reverse) improved sentiment. From a technical perspective EURUSD support is around the July bullish daily trendline (1.2980) while resistance is near the December highs just above 1.33. Our end-Q1 forecast is for EURUSD to gain to 1.35.
– JPY on the defensive, but BoJ could prove to be a disappointment
USDJPY bounced back and markets appear to maintain their negative JPY bias. PM Shinzo Abe repeated the call for the BoJ inflation goal to be doubled to 2% while BoJ Governor Masaaki Shirakawa said the central bank was in close contact with the government. There is still however some uncertainty on whether the bulk of any prospective BoJ actions will be delivered at January meeting, or after the appointment of the new Governor/ Deputy Governors in early April. We also note that the latest JPY sell-off (13% since November) indicates that the market has already priced in the notion that the BoJ will successfully deliver a significant acceleration in domestic inflation target to 2%. In this context, we see a clear risk of ‘selling the fact’ on any BOJ announcement given the over-extended long USDJPY positioning. We also note a risk of a JPY bounce back if foreign investor book profits on their long Japanese equity exposure. The strong positive correlation between USDJPY and Japanese equities (80%, 3m rolling) may indicate that these purchases have been highly hedged.
BNP Paribas