– EUR could trade weaker this week before resuming rally
On a multi-week/month view, we like EUR higher and have revised our EURUSD forecast higher to 1.4000. However, this is a medium term view and for the week ahead, the risks seem skewed to the downside given a combination of (a) euro zone risk premia edging higher and (b) EUR rates edging lower following lower than expected weekly LTRO repayment declared on Friday. Euro zone risk premia are beginning to edge higher from very low levels, with the move being led by a widening in Spanish spreads; Spain 10Y yields are some 20bps wider this morning as the Spanish opposition (Socialist) party has called on PM Rajoy to step down on allegations of corruption. Spanish bond auctions (Thursday) may need to generate a decent result to sustain the EUR. Elsewhere, Berlusconi has closed the lead enjoyed by Bersani in Italy’s opinion polls. While our economists continue to expect a market-friendly election outcome in Italy, uncertainty could still increase and hold back euro-optimism a little bit. EUR has already converged to the improvement in risk premia, so a consolidation should not surprise. However, any dips over the next 1-2 weeks should provide EUR buying opportunities. We still think a broad range of investors (FX reserve managers included) are still underweight EUR and will line up to buy the dip.
– 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 5bps priced in) suggests downside risk for AUDUSD. But a 25bps rate cut is fully priced in by the fourth meeting (8 May). Thus the tone of the statement and forward guidance will be more important, and any indication that the move is the last in the easing cycle should see AUD recover. 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, though there will be distortions on account of New Year effects. We stay long AUDUSD, targeting 1.0850.
– Local news flow keeps JPY under pressure
US treasuries have continued to remain under pressure (10y yields still above 2.04%) and this should keep USDJPY supported. The domestic news flow continues to remain JPY bearish helping USDJPY above 93.00 this morning. Japan’s public pension fund (GPIF) is reportedly considering reducing its 67% target JGB allocation (about JPY 72.4tn) in favour of emerging market stocks, with the discussion to start in April to May. Meanwhile, Japan Finance Minister Aso said the government was imitating the policies of former Finance Minister Takahshi in the early 1930’s. For some background, Takahashi had the BOJ underwrite JGBs to fund deficit spending and resulted in inflation moving higher. Fed Chairman Bernanke referenced and advocated such policies in a 2003 speech.
– ECB unlikely to provide bullish EUR catalyst this week; Spain auction eyed
The key event is the ECB policy announcement on Thursday and we are unlikely to see the ECB provide a bullish catalyst for the EUR as it had done at last month’s meeting. 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 pressconference, 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.
BNP Paribas