– Still plenty of upside for the EUR
The rally in the EUR continues to draw support on several fronts. The ECB announcement that banks will repay EUR 137.2bn of the first LTRO tranche on January 30 was on the high side of market expectations. In our view, the outcome is significant as it a) indicates that financial conditions in the eurozone continue to improve, b) suggests a potentially sizeable withdrawal of excess liquidity which could put some further upside pressure on eurozone rates and c) accelerates the shrinking of the ECB’s balance sheet, which stands increasingly in contrast to the central banks elsewhere in the G4. While we suspect the ECB will be wary of putting excessive pressure on FX and rates, we do not believe current levels of EUR a cause of significant concern. Comments from ECB’s Visco and Coene last Friday were generally along the positive lines. Less under the spotlight, but still notable, is the improvement in the survey data (from what are admittedly very depressed levels). This week, the eurozone economic sentiment indicator due on Wednesday should confirm the trend with a third straight gain to 88.8. In this context, we believe a break of 1.35 on EURUSD is in the pipeline. We also favour maintain a long exposure on EURCHF where we target 1.28; SNB Chairman Jordan reiterated current policy stance on Friday, suggesting CHF is still highly valued and should weaken. We also remain long EURSEK, targeting 8.80.
– Focus back on the Fed and US data; look for a bounce in GBPUSD and AUDUSD
This week brings the FOMC announcement on Wednesday, although it is unlikely to be a show stealer. In our view, nothing in the recent data points to the substantial improvement in the labor market that the Fed has been looking, while the Fed is clearly aware of the negative growth impact of fiscal tightening in H1. Thus, our US economists expect no change in policy and only minimal change to the language of the FOMC statement. Friday’s January non-farm payroll report will thus also be seen in light of the Fed’s 6.5% goal – we expect that the jobless rate will tick-up to 7.9%, which should cool off any hopes for an early end to QE3. The US Q4 GDP report on Wednesday should deliver a lukewarm 1.3% q/q saar pace, which would put 2012 growth at 1.9% q4/q4, about in line with our expectations for 2013. A refocus on the US calendar, should support some of the recent laggards, notably GBPUSD and AUDUSD where we maintain long trade recommendations.
– JPY still a one-way street
The JPY sell-off shows few signs of abating as USDJPY trades around 91.00 and EURJPY around 122.50. Some barrier resistance is likely at 91.50, but given the strength of the move in EURJPY, we would not look for an immediate reversal of the JPY’s weaker trend. Japanese political rhetoric once again contributed to JPY weakness and markets remain focused on the FX impact of ‘Abenomics’. PM Abe urge BOJ to achieve its 2% CPI target as soon as policy and that he aims to bring the primary budget balance into the black to achieve fiscal reforms. For domestic data, service sector prices fell for the seventh straight month at 0.-4% YoY in December. We expect the December industrial output (Thur) to post a 3.5% MoM rise. But US data could prove more important, with US Treasury yields worth watching after a run up to 1.94% in 10Y yields.
– IMM shows mixed trends for USD positioning
The latest IMM positioning data (for w/e January 22) shows a slight decrease in the overall level of USD short positions. EUR bullish bias extended to a net 21.3k contracts, the highest level since July 2011, but still well below the May 2011 high of 99.5k contracts. JPY net shorts fell marginally, while GBP net longs saw a more sizeable fall of around 35% to around 18k contracts. CAD net longs fell – a move likely to have been extended after the dovish BoC policy announcement on Wednesday. AUD net longs rose to 97k contracts, close to the record highs seen in mid-December.
BNP Paribas