– EUR-crosses surge with EURCHF breaking out
EURUSD (and EUR-crosses more broadly) have continued to remain strongly supported following from last week’s bullish catalyst coming from the ECB. We remain positioned long EURCHF (target 1.2500) and EURSEK (target 8.80) to play further EUR gains, and EURCHF has moved considerably – by almost a big figure to 1.2273- this morning. Our peripheral spread indicator – which correlated well with EURCHF before the 1.200 floor was put in place- moved sharply higher in early January and continues to flag further gains. EURUSD will continue to remain supported, but while the move has been exclusively driven by the EUR leg, the USD could contribute more in the days ahead. Tonight (21:00 BST) Fed Chairman Bernanke speaks on the topic of monetary policy and the US economy. If he attempts to talk down the more hawkish FOMC minutes earlier this month, the USD could come under further pressure. Broader risk-sentiment could be influenced by the US earnings season; this week 53 companies from the finance sector report earnings, including the big US banks.
– Scope for USD to lose yield-related support this week
There remains scope for reduced US yield support to weigh on the USD. The market impact of the more-hawkish FOMC minutes (released Jan 3) have yet to fully reverse; US yields (both 5,10Y) have only retraced about half of the spike higher in yields seen since the beginning of the month. This week there are a number of catalysts in the form of Fed commentary and economic data that could influence the USD. A host of dovish Fed members speak this week, including Williams, Lockhart and Chairman Bernanke (21:00 BST) today, followed by Rosengren and Kocherlakota on Tuesday. Should Bernanke clarify any doubts sparked by the less dovish FOMC minutes, the USD could come under further pressure. Just last week, Kocherlakota- traditionally a moderate with a hawkish bent- said Fed easing may not be aggressive enough and if anything monetary policy was too tight. Our economists forecast weaker than consensus outcomes for US retail sales (Tues; 0.1% m/m vs. +0.2% exp) and industrial production (Wed; +0.2% m/m vs. +0.3% exp). Our economists revised down their forecast on Q4 GDP (due Jan 30) to 1.3% q/q SAAR (from 1.5%) on account of the weakness in trade data.
– Commodity currencies lag; China data may provide catalyst into next week
Commodity currencies have continued to lag the sharp move in EURUSD and AUDUSD has failed to break above the 1.0600 level. The underperformance of the commodity bloc comes despite sharply higher CNY fixings last week (over 1%) and a bullish tone in Chinese equities. Our economists forecast a slightly stronger print on Thursday’s employment data from Australia (9K vs. 4.5K exp) though the jobless rate is expected to tick higher. Friday’s release of Chinese data, including December IP, retail sales, FAI and Q4 GDP will be important. All readings are expected to improve, and could provide that positive catalyst for the commodity bloc. While the EURUSD could dominate and EURAUD could rally further, we are only 1% away from range-resistance at 1.2850. Depending on how the Chinese data come out, the commodity bloc could make a come back next week. We hold our long AUDUSD recommendation targeting 1.0850.
– USDJPY rallies despite short-covering from IMM accounts
JPY has continued to remain under pressure, with the latest catalyst coming from PM Abe reiterating that the BoJ would need to move the inflation goal of 1% to a target of 2%. However, political rhetoric is becoming more mixed with Economy Minister Amari stating that too much JPY weakness (beyond 90) may be counter-productive. The IMM-data (a proxy for hedge-fund positioning) showed that investors slightly reduced short-positions for the fourth straight week, a period over which USDJPY increased 5-figures up to 87.50. This could suggest that JPY-selling is beginning to broaden out amongst the investor community. However, we continue to believe that the JPY move is stretched ahead of next week’s BoJ meeting.
BNP Paribas