– EURUSD rally to extend further
We view the past week as a potential a game-changer for the EUR. The shift in tone from the ECB was significant in both signalling that rate cuts are off the agenda for the moment and that policymakers expect the recent wide improvement in financial market conditions (labelled “positive contagion” by ECB President Mario Draghi) to eventually feed through to the real economy. Considering that ECB is currently the only G4 central bank with a shrinking balance sheet, this suggests that monetary policy fundamentals are turning EUR-positive. In our view, the global FX reserves data suggests pent-up EURUSD demand as EM reserve managers are still overweight USD and underweight the EUR. Meanwhile, BNP Paribas STEER™ indicates EURUSD rally can run further still, with the fair-value currently 1.3430. We also believe that markets are not positioned for a stronger EUR, with our own positioning indicator pointing to a neutral EUR bias. We maintain our long EURCHF trade, targeting 1.2500 (entry: 1.2060). The on-going improvement in the eurozone financial conditions and the narrowing in the eurozone risk premia should support EURCHF from here (see chart below). We maintain a long EUR position against the SEK, targeting a move to 8.80.
– No help for USD from US data
The international trade balance report for US was much weaker than expected, with the deficit jumping to USD 48.7bn. This is clearly a negative for Q4 GDP and our US economists are looking for a 0.2-0.3% downward revision to their 1.5% q/q saar estimate. We expect growth in Q1 to slow further as disposable income takes a hit from a 2% hike in the payrolls tax. In this context, we believe that hopes for an early end of QE3 are unfounded and the Fed will continue expanding its balance sheet through 2013. This week’s US economic data calendar is pretty heavy, but we do not believe it has scope to offer much support to the USD at this juncture. On Tuesday, we expect December retail sales to show a flat reading at the headline and a 0.3% m/m gain at the core rate. On Wednesday, December industrial output should slow to 0.2% m/m, while on Thursday December housing starts are seen to bounce to 895k saar units. Fed Ben Bernanke speaks on Tuesday, and we will be watching out for any mention of the economic impact of the fiscal-cliff deal.
– JPY remains vulnerable amid political pressure
USDJPY rallied above the 89.50 as Japan PM Abe continue to ramp up pressure on the BOJ to unleash bolder easing measures. The government announced a JPY 10.3 tn. fiscal stimulus package while the BOJ is expected to formally approve an increase to the inflation target to 2% at the 21-22 Jan policy meeting. This week, we expect November core machinery orders to fall by 0.5% m/m on Wednesday, reversing part of the October gain. 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. BNP Paribas STEER fair value model also indicates that USDJPY is substantially overvalued.
– Stay long AUDUSD ahead of further data from China
After firmer December exports and CPI data from China, the spotlight over this shifts to Q4 GDP, December retail sales and IP data due on 18 January, which should offer a further confirmation of a rebound in Chinese economy. Noteworthy, USD/CNY fixings were lower by more than one big figure last week. We expect this trend of stronger fixings to persist (today’s fixing cracked below the 6.2700 support), and this should feed into support for a stronger AUD. Australia’s December employment data on Thursday should show a respectable 9K gain in new jobs. We stay long AUDUSD entered at 1.0390, targeting a move to 1.0850.
BNP Paribas