– ECB to cool the EUR’s momentum
EUR remains the star performer, with EURJPY up 3.5%, EURGBP up 2% and EURUSD gaining 1.8% over the past week. We remain bullish on EURUSD and have raised our medium-term target to 1.40. In addition to the positive shift in fundamentals (reduced ez market stress, shrinking ECB balance sheet and higher short-term yields) we think the EUR remains driven by position adjustment and FX reserve manager demand. That said, this week will see risk points for the EUR that may temper the rally. The key event is the ECB policy announcement on Thursday. We do not expect anything new from the economic assessment – Mr Draghi is likely to mention the improvement in survey data. More important details are likely to transpire at the press-conference, including a) the possibility of private sector sharing of the Cyprus bailout, b) the rapid rise in the EUR and c) shrinking liquidity as a result of early LTRO repayments by banks. On all fronts, there is limited scope for a bullish EUR surprise, which is likely to lead to a less euphoric market reaction than at the prior’s meeting. On the issue of EUR appreciation, political noises are inevitable ahead of G20 meeting on February 15 – France’s Finance Minister said that Euro is perhaps too strong. Finally, the Spanish long-term bond auction on Thurs could also produce some jitters. This week could prove to be a week of consolidation before the next move higher. One cross that continues to underperform is EURCHF, in part due to positioning and in part due to the periphery-core Eurozone bond yields spreads moving sideways (see chart). We see plenty of scope for an eventual catch up in EURCHF, targeting 1.35 by Q3.
– US data just enough to keep equity and USDJPY bulls in control
US January NFP printed a gain of 157k, in line with expectations, while prior data was revised higher by a total of 127k. Although this brings the average for Q4 to 200k, we would still argue that the US labour market picture is that of stability rather than acceleration. The unemployment rate ticked up to 7.9%, moving further from the Fed’s 6.5% goal. Fed James Bullard suggested on Friday that a number in the ‘low 7s’ could lead to the end of QE but even that threshold clearly remains quite far (the jobless rate has been steady since Sept). Meanwhile, the January manufacturing ISM report was upbeat with a gain to 53.1. US Treasuries have seen a fair share of volatility last Friday (yields down after the NFP but up after the ISM), but the 10y yields appears reluctant to dip much below 2%. This should keep USDJPY supported with our end-Q1 forecast raised to 95.00. Note too, there are two domestic news flows today worth noting: (i) Japan’s public pension fund (GPIF) reported that it is considering reducing its 67% target allocation of JGBs (about JPY 72.4tn) to increase exposure to emerging market stocks, discussion to start in April to May; (ii) Bloomberg article quoted comments from Japan Finance Minister Aso who said that that his government is imitating his Depression-era predecessor, Korekiyo Takahshi, who previously told BOJ to underwrite JGBs to fund deficit spending. Any suggestion that current BoJ would underwrite JGBs outright would be extremely bullish USDJPY.
– A busy week to bring some relief to the AUD
The AUD has plenty to look forward to this week. Our economists’ non-consensus call for a 25bp RBA rate cut on Tuesday (only 22% priced in) suggests downside risk for AUDUSD. But we still believe the pullbacks will be well supported as AUD has been a laggard this year, much like other commodity currencies. We also believe there are reasons to remain positive on AUD including Fed’s QE3, demand from FX reserve managers and a bounce in some key commodity prices (e.g. iron ore). Domestic data this week should also shift to a more encouraging tone where retail sales (Wed) and employment (Thurs) should bounce back from negative readings. Chinese data will be important as well; we are looking for acceleration in Jan exports to 14.8% y/y, while the Jan CPI should slow to 1.9% y/y. We stay long AUDUSD, targeting 1.0850.
BNP Paribas