– ECB could offer a EUR buying opportunity
EURUSD has been trading within the 1.3450-1.3650 range going into a very busy European event calendar today. On the ECB meeting, the immediate question is to what extent the ECB addresses EUR strength. We believe it is difficult to make the argument that EUR is particularly overvalued at this point – our FEER model puts the long-term fair value at 1.32. The recent move higher has been fast, but probably not in the ‘brutal’ category, to borrow from the former ECB President Trichet’s terminology. We also suspect that the majority (or at least the ‘heavyweights’) on the Governing Council will reason that the EUR strength is the result of real improvements in the financial markets and economic outlook, thus not warranting action at this point. That said, our economists suggest that Mr Draghi will probably soften the overall tone at the press conference, signalling that easing options are still available if needed. This should temper some of the rates/FX euphoria that followed the January announcement and the LTRO repayments. Outside of the ECB, there are plenty of reasons to justify a more defensive EUR tone, mainly the political uncertainty in Spain where we expect the government’s ability to proceed with reforms and request financial aid hindered regardless of whether PM Mariano Rajoy stays or leaves. Risks are compounded by today’s Spanish bond auction. Finally, FX comments by politicians are likely to continue, although their impact has been limited. In contrast to the earlier comments by the French President, German officials said EUR appreciation showed renewed market confidence and that ‘exchange rate policy’ was an inadequate measure. Our bias is to look for buying opportunities on dips in the coming weeks; we believe EURUSD can reach 1.40 before any serious FX concern transpires from eurozone policymakers.
– BoE announcement to be overshadowed by Carney
The Bank of England should leave policy rates and the asset purchase program unchanged today. The policy announcement is likely to be overshadowed by the Governor-designate Mark Carney’s appearance before the House of Commons Treasury Committee (TSC). The market will be listening to Mr Carney’s comments extremely carefully for views on the current state of the UK economy and his attitude to both the existing inflation target and the scope for further monetary easing. Since a change in the target is a decision for the Chancellor, at the hearing Mr Carney is unlikely to offer any drastic policy changes (e.g. nominal GDP targeting). This should temper some of the outsized reaction in the bond and FX markets after Mr. Carney first detailed the possibilities for alternative measures back in December. On the data front, we are less optimistic than the market for the December manufacturing output read but still expect a gain of 0.3% m/m. Our short-term models suggest GBP is cheap vs. both USD and EUR, suggesting risk of a rebound.
– AUD slightly supported by better than expected employment print, watch Chinese trade prints tomorrow
AUDUSD support at 1.0300 held in given that January’s headline employment print surprised slightly on the upside (employment rose 10k, above the 6k expectations), albeit the split between full-time and part-time employment was disappointing. The rise in employment came from rise in part-time employment by 20.2k from prior, while full-time employment fell 10k, the third straight month of decline. Nevertheless, Aussie employment outlook appears brighter compared to the weaker than expected employment data from New Zealand, where employment fell 1.4% YoY (against exp: 0.2% rise) in Q4 and participation rate eased to 67.2% QoQ (against exp: 68.4%). This saw AUDNZD recovering back above 1.2300. We remain AUD bullish medium-term on Fed’s QE3, China’s growth pick-up and stronger trend in Australiaspecific commodity prices. The spotlight shifts to Chinese exports and CPI data due tomorrow. Acceleration in Chinese exports and imports should help limit AUDUSD recover.
BNP Paribas