– EUR still in the driving seat; stay long EURCHF and EURSEK
The EUR has bounced back with EURUSD up in the 1.3350-1.3400 range, EURJPY broke above 120.00 and EURCHF cracked the 1.2500 resistance. The catalyst for the EUR has been a move higher in European rates (in part due to the unwinding of positions), with the 4th euribor contract down by 13bp yesterday. Meanwhile, there has been some further improvement in eurozone sentiment. Reports suggesting that Portugal may be returning to the debt markets with a 5Y syndicated bond issue in February provided the initial boost, while solid debt auctions added to this sentiment. Spain conducted another strong auction and our fixed income strategists think the recent two Spanish auctions and the Italian 15Y auction have set a strong start for peripheral bond markets. We view that EURUSD dips continue to present buying opportunities for a further run up to the 1.3500 level, which would bring the pair closer in line with our fair-value estimates. That level may also be a potential pivot for prompting a broader market participation in the rally. We have revised higher the target for our long EURCHF trade recommendation to 1.2800. We believe this new target is consistent with the recent reduction in eurozone stress, while we also suspect that most of the potential unwind of the CHF safe-haven positions is still ahead of us. We also hold onto our long EURSEK position (target 8.80).
– Global and China positives to trump domestic negatives for the AUD
Chinese data printed marginally better than expected, indicating that the Chinese growth rebound picture is intact. Real GDP growth accelerated to 7.8% in Q4, beating the 7.5% target as investment continued to drive growth. The rebound in export growth supported industrial production growth which rose 10.3% YoY in December from 10.1% prior. Retail sales rose 15.2% YoY from 14.9% in November. We expect AUD to benefit from the improved Chinese outlook; stay long AUDUSD targeting 1.0850. In addition, any dips in the AUD should also be limited given the better global sentiment. Global equity markets continue to perform strongly, up by more than 3% since the start of the year and 10% over the past two months. We suspect that these gains will eventually trigger the catch-up of high-beta commodity currencies to the EUR. These should prove more important for AUD than domestic negatives, in our view.
– USDJPY prints new highs on BoJ headlines
USDJPY broke above 90.00, a key barrier level and a 2.5-year high late in the N. American session. The boost was provided by further newswire reports on next week’s BoJ meeting. The reports suggested that the BoJ may consider openended asset purchases until the 2% inflation target was achieved, while potentially scrapping the 0.1% floor on short-term rates. In our view the key question is not so much how long the BoJ is prepared to ease (our economists expect a 2% inflation target and an open ended commitment to buy JGBs), but whether the BoJ is prepared to aggressively step up the pace of balance sheet expansion and attempt more radical measures such as foreign bond purchases. For the latter, international reaction may become an important hurdle, especially as some countries have already expressed concern over the pace of recent JPY weakness while Japan PM Abe’s economic adviser Hamada said that Japan should be worried if yen weakness accelerates to 110 yen vs dollar or more. All in all, we suspect it will be challenging for the BoJ to surprise market expectations next week given that much has been priced in. A ‘buy rumor, sell fact’ reaction is likely.
BNP Paribas