– Moving from strong eurozone to weak US data this week
The stand out development at the beginning of the week has been the sizeable short-squeeze seen in USD/Asia, with IDR, KRW, TWD and MYR falling over 1.20% today. This is not coming in the backdrop of risk-off (which traditionally the case) but rather on account of the sharp weakening in JPY. It is clear that here the JPY move is starting to bite into recent trends in Asian currencies. In G10, however, it seems the sharp EUR rally is having the biggest impact and leaving the majors sidelined to the bottom end of recent ranges. This week, we will be moving from a period of upside surprises in eurozone economic data to one of weaker US data (more below). We wonder if this could finally see a shift in market focus away from the EUR and more towards the USD. However, this may not occur today with US durable goods orders likely to print on the strong side given the sharp boost coming from Boeing orders in December.
– EUR still solid; ECB commentary and Italy auction in view
The rally in the EUR continues to draw support on several fronts, including (a) news of a larger LTRO repayment, (b) eurozone officials’ non-activist FX views in sharp contrast to other countries, (c) stronger data recently and (d) strengthening in capital inflows. Wednesday’s auctions from Italy (5 and 10Y, EUR 5-6bn) will be a focus this week. In recent weeks, results on Spanish and Italian auctions have been strong and have continued to result in eurozone stress staying low- but not moving lower. The chart below shows two major drivers of EUR: eurozone stress and yield advantage. While eurozone stress dominated moves in EUR for 2012, the most recent EUR move has come on account of the move higher in eurozone yield advantage. If this continues, then ECB rhetoric and/or data may have a bigger impact on the EUR in the days ahead. We would monitor the pipeline of ECB speeches this week with Praet and Asmussen (Tues), Nowotny and Weidmann (Wed) and Liikanen and Constancio (Thurs). Our economists forecast a stronger print on the eurozone economic sentiment indicator (Wed) – the third straight gain in the data series. This should further help EUR; we maintain long exposure via long EURCHF (target 1.28) and long EURSEK (target 8.80).
– Focus back on the Fed and US data
This week’s FOMC announcement (Wed) is unlikely to be a big market mover with no press conference in store. Our US economists expect only minimal change to the language of the FOMC statement. Friday’s January non-farm payroll report could be more important. While the headline may be less interesting (BNP Paribas forecasts 150K vs. 160K consensus), the details should be weaker. Our economists look for weaker growth in average hourly earnings (0.1% m/m vs. 0.2% consensus) and a tick higher in the jobless rate (7.9% vs. 7.8% expected). This should cool off any hopes for an early end to QE3. The US Q4 GDP report (Wed) 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.
– 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