– Hawkish ECB supports further EURUSD gains; stay long EURCHF on news of negative Swiss rates
EURUSD rallied on the back of a change in rhetoric at the ECB monetary policy announcement. The main shift in rhetoric was during the Q&A session as ECB President Mario Draghi said the decision to leave rates unchanged was unanimous, while also listing a number of “significant” improvements in market conditions, including bond markets, stocks, market volatility, deposits in peripheral economies and target2 imbalances. In the ECB’s view, the improved market conditions and reduced financial fragmentation will eventually feed through to stronger economic activity. The hawkish tone here clearly contrasts with the “wide discussion” on a possible rate cut at the December meeting. The key takeaway is that further ECB easing is off the agenda unless broader financial market conditions deteriorate significantly, which is not our base scenario. The shift in ECB’s tone supports what we believe will be a more positive flow backdrop for the EUR. In our view, the global FX reserves data shows pent-up EURUSD demand as EM reserve managers are still overweight USD and underweight the EUR. Our STEER model suggests EURUSD is far from overvalued even after yesterday’s bounce, and we believe a re-test of 1.3325 resistance on the cards. We also favour further EURCHF gains and stay long targeting 1.2500 (entry: 1.2060). Further news that another Swiss bank may start applying negative rates to savings accounts of smaller depositors saw EURCHF break above 1.2100. To the extent that deposit flight has been a driver of CHF strength, the news is a negative for the currency. More importantly, we believe that the on-going improvement in the eurozone financial conditions and the narrowing in the eurozone risk premia support EURCHF gains.
– JPY remains vulnerable amid political pressure while current account flipped to deficit
Despite a generally softer USD, JPY remains under pressure amid political pressure for bold monetary easing from the BoJ in January. In the latest comments, PM Shinzo Abe said the BOJ should include employment among its goals. Nikkei reported that a joint statement on policy cooperation being drafted by the government and the BOJ will refer explicitly to a 2% inflation target, while the BOJ is expected to formally approve the change at the 21-22 Jan policy meeting. But we reiterate that much of this has been already priced in, suggesting risk of a ‘buy rumor, sell fact’ reaction. The government has approved a JPY 10.3tn stimulus package, which is expected to push real GDP by 2% and create 600,000 jobs. This will be financed by issuance of an addition JPY5tn govvies, the first in three years that addition bonds were issued for a supplementary budget. Meanwhile, the release of Japan’s current account flipping a larger than expected deficit of -JPY 222.4bn (first deficit since Jan 2012) from a surplus of JPY 376.9bn in October prompted a knee-jerk higher USDJPY above the 89.00 resistance. The deterioration was due to a larger than expected JPY 847.5bn trade deficit while income surplus narrowed to JPY 891.5bn from JPY 1.24tn prior. Whilst near-term momentum seems to favour a higher USDJPY, we do not advise chasing the move at this level as our positioning indicator continues to show JPY shorts at near-extreme levels, and our STEER model indicates fair-value for the pair at around 83.00.
– Stay long AUDUSD; watch next week’s Chinese data releases
Chinese CPI printed higher at 2.5% YoY, above consensus of 2.3% in December and up from 2.0 prior led by spike in vegetable prices amid the cold weather. Our China economist expects an accommodative monetary policy this year, but monetary condition would be less lax, on rising inflation and better growth. The spotlight shifts to next week’s Q4 GDP, retail sales, FAI and IP data for further confirmation of a rebound in Chinese economy, which will support more AUD gains. Noteworthy, USD/CNY fixings are lower by more than one big figure this week. We expect this trend of stronger fixing to persist, and this should feed into support for a stronger AUD. We stay long AUDUSD entered at 1.0390, targeting a move to 1.0850.
BNP Paribas