– EUR down but far from out after the ECB
The EUR has been under pressure after the ECB announcement. The accompanying statement by ECB President Mario Draghi repeated than risks to price stability were broadly balanced but added the reference to the EUR appreciation as the downside risk to the outlook. According to our European economists this suggests a potential shift in the assessment of the balance of risks to price stability in March, which would effectively imply an easing bias. As we suggested earlier this week, the EUR was ripe for a correction, with most of the recent “good news” already priced in. Since Eurozone financial markets have been under increasing pressure on renewed political jitters in Spain and Italy this phase of EUR consolidation could extend into next week. Our medium-term bullish view is unchanged however – dips remain buying opportunities and a broad range of investors (reserve managers included) will be looking to buy into EUR weakness. We still believe EUR is not overvalued at current levels – Mr Draghi’s clarifying remark from the press-conference reiterated that the EUR’s nominal and real value was around the long-term average. Our FEER model puts the long-term fair value at 1.32. We also note that the fading of EUR-specific positive surprises does not necessarily imply a reversal in the EUR’s trend. Should the US data start disappointing as we expect, the focus will shift back to the Fed’s QE3. This would see EURUSD supported via broader USD weakness. Thus, we acknowledge that momentum has slowed but still believe the eventual peak will be near the 1.40 level, which we expect to be reached by Q2.
– AUD and CAD are slightly defensive, but medium term view still positive
AUDUSD downside has been limited following the strong CNY fixing (USDCNY fixed 105 pips lower) coupled with the release of a sharp rebound in exports and imports in China. Chinese exports rose 25.0% YoY in Jan against forecast of 23.5% and up from 14.1% in Dec, while imports growth grew at 28.8% YoY vs. forecast of 23.5% and up from 6% in Dec. Trade surplus stood at USD 29.5bn against USD 24.7bn expected. Note that our economists pointed out though that after stripping out the working days effect (there were 22 working days in Jan ’13 against 17 days in Jan ’12), the exports grew just 12.4% YoY vesus 3.4% in imports. Stilll, the online survey of export managers’ index increased by 3.3 in Dec to 37.5 in Jan, suggesting a still positive export outlook. We believe markets have been excessively pessimistic on the AUD given that some global factors remain supportive, ie. steadier financial markets, faster growth in China and higher commodity prices. We maintain a long AUDUSD position entered at 1.0390, with a target of 1.0850 and the stop at 1.0150. Meanwhile, CAD has been flying under the radar lately, but the recent range could come under pressure from today’s Canadian employment report. We expect a decrease of 5k jobs and a gain in the unemployment rate to 7.2% – largely a payback for previous strength and a reflection of the fact that job growth has been outpacing the rate of economic expansion. Although this could put some upside pressure on USDCAD, the recent high of 1.0100 should provide some solid resistance. We also maintain our CADNOK long trade entered at 5.4640, targeting 5.7500. The cross has been driven lower by the significant divergence between Canadian oil prices and global benchmarks, but we expect that divergence to reverse in the coming months.
– Carney’s comments should temper GBP bearishness
GBP has drawn some support from comments by the incoming BoE Governor Carney. Mr. Carney said flexible inflation targeting remains the best framework, nominal GDP targeting has advantages in theory, and that policy targets should be reviewed and regularly debated by the Government in a periodic manner. Although Carney’s message are more generic and long term, we think that relative to inflated expectations ahead of the event, this is positive news for GBP. Since the Dec 11 nominal GDP targeting speech, GBP has fallen up to 7% vs. G10 and we believe than move is overdone.
BNP Paribas