– G10 FX to consolidate ahead of Friday’s NFP release
The European session has been characterised by idiosyncratic moves, with some NZD out performance on a slightly hawkish RBNZ statement overnight and NOK under performance on weaker retail sales data. There has been some retracement of the strength seen in euro-centric currencies over the past week. Following yesterday’s still dovish FOMC and GDP outcomes, US yields have backed lower; US 5Y is down 6 bps, the 10Y is off 7bps at 1.97% and importantly below the 2% psychological level. However, the move lower in US yields has also been accompanied by softer equity markets suggesting a slight risk-off tone. This has kept AUDUSD under the cosh and just above 1.0370 support. A more risk-positive tone coupled with a more optimistic sounding RBA next week would be needed for AUDUSD to recover. Given caution ahead of next week’s RBA meeting, a potentially stronger China PMI print tomorrow may be better pursued on NZDUSD. Looking ahead today, a consolidative tone will likely persist until Friday’s US non-farm payrolls release. The January ADP employment report was stronger, but the prior month’s reading was revised down. Our US economists expect a headline of 150k gain on headline for NFP, with look for weaker details i.e. softer average hourly earnings and a tick higher in the jobless rate. The DXY index is threatening trend line support at 79.2. From a technical perspective, a clear break of this level would open further USD downside.
– SNB Q4 FX reserves suggest no more scope for EUR-cross selling flows
The SNB released the detailed FX reserve figures for Q4 and the takeaway had continued bullish implications. Not only did FX reserve growth moderate (suggesting less intervention needs on declining eurozone stress), but the EUR share of reserves recovered to 50.1% (from 49% in Q3) while shares of other currencies declined. Our view has been that the SNB has a preference to maintain its EUR allocation at around 50%- in line with its historic average. Given that the allocation is now back to this level (down from 60% in Q2 2012), it suggests that there may be no more pent-up demand to diversify away from the EUR and into other currencies. Unsurprisingly, the allocations made to GBP and “other currencies” remained static (at 6.7% and 4.2% respectively). Accordingly, it suggests less EUR selling pressure going forward, particularly if underlying eurozone stress continues to remain low as we expect. This should translate to even less resistance to a continued appreciation in EUR-crosses more generally.
– Fed reaffirms QE commitment
The FOMC reaffirmed its commitment to the USD 85bn per month asset purchase program and made only minor changes to the language of its statement. The Fed said growth in economic activity has paused largely due to temporary factors and noted that the financial market strains had “eased somewhat”. Kansas City Fed President Esther George, who had previously expressed reservations about QE3, dissented noting the risk of future economic and financial imbalances resulting from current policy. The dissent is thus not a surprise and effectively replaces the vote of the previous dissenter Jeffrey Lacker. The Fed statement also made no reference to the negative drag from fiscal policy, which will be increasingly relevant going forward, in our view. The bottom line is that there are no signs of a shift away from QE3; moreover, recent data suggest that the economy remains well short of the substantial and sustained improvement that the Fed is looking for. US Q4 GDP growth was the big surprise with a decline of 0.1% q/q saar. While large contraction in government spending weighed on the quarterly outcome, the subdued 1.5% growth pace for 2012 remains well below trend.
BNP Paribas