– EUR faces upside risks into the end of the week
EURUSD remains on a choppy path but we expect EURUSD to trade higher into the end of the week. There has been some focus on the ECB announcing tomorrow the details of next week’s first early LTRO repayment. Note that this applies to the first LTRO tranche (EUR 489bn), hence the data will be important to gauge the likely pace of repayments this year and its impact on rates/FX. Our base case scenario is for a modest repayment of around EUR 100bn this year, without a significant impact on rates. However, an upside surprise on the Friday announcement could signal a faster pace, which could put upside pressure on eonia and the EUR (our rates strategists estimate that around EUR 250bn in repayments this year would lift the eonia rate by 20bp). The eurozone data calendar will also be in focus over the next two days. Today brings about the Eurozone flash January PMIs where we expect further improvement to 46.5 in the manufacturing index and 47.9 in the services index. Our long EURSEK recommendation (targeting 8.80) remains one of our favoured ways to position for a stronger EUR, and we think a weaker Swedish jobs print today (jobless rate expected higher at 7.8% vs. 7.5%) could provide another catalyst. The Riksbank has recently been more mindful of the softening of the labour market with the Deputy Governor Ekholm stating that the relative strength of SEK could provide further room for rate cuts.
– Japan posted a trade deficit for the sixth straight month on the back of slump in exports
Japan posted a trade deficit of JPY 641.5bn in December, weaker than market expectations of a JPY522.8bn deficit, albeit a slight improvement from a revised JPY 954.8bn deficit in November. The slump in exports for the 7th-month by -5.8% YoY (vs. forecast of -4.2% and -4.1% prior) highlights the on-going weak external demand. Notably, exports to Asia (which accounts for over 50% of Japan’s exports) fell by 5.6% YoY in December, with exports to China falling by a steeper 15.8% in December on the back of deterioration in ties with China. Post-data release, we saw a knee-jerk higher USDJPY with the pair back above the 89.00 level. While economic theory suggests that weaker BoP should feed through to a softer JPY, we note that this is only one of the drivers of JPY. The moves in USDJPY over the recent years have been dominated by BOJ vs Fed policy expectations. In the medium-term, we still expect broad weakness in the USD, driven by the aggressive easing of the Fed to be the key driver of USDJPY. In the near-term, Japan’s political jawboning and policies are likely to take centre-stage. USDJPY has been supported today on comments made Vice Fin Min Nakao that Japan “will take appropriate action if necessary” following the yen’s rise post-BOJ, Japan’s government Nishimura comments that ‘yen at 100 per USD is no problem” as well as speculation that the Council of Economic and Fiscal Policy meeting today could lead result in addition measures. The meeting agenda is likely to be focused on budget and tax issues.
– More dovish BoC takes the shine off CAD
USDCAD rallied on the back of the Bank of Canada policy announcement which softened the tightening bias and downgraded the macroeconomic outlook. The BoC said the economy will not reach full capacity before H2 of 2014 and suggested that the timing for policy tightening was “less imminent than previously anticipated”. While the statement is very much in line with our expectations for the BoC to remain on hold until the middle of next year, Canadian rates saw a sizeable move today (3-month year-ahead rates down 8bp). This BoC announcement moves CAD lower in the commodity currency rankings and we see further upside risks for AUDCAD above 1.0600 and NZDCAD above 0.8400. At the same time, our preference is to sell USDCAD on rallies above parity, with 1.0050 the first notable resistance level. Our FX positioning analysis does not suggest the risk of an aggressive upwind of CAD longs as overall positioning has been relatively contained recently.
BNP Paribas