– Japan’s Aso downplays foreign bond buying…JPY weakness stalls
Japan’s finance minister Aso has raised doubts about prospects for Japan to purchase foreign bonds in order to weaken the JPY. The comments have pushed the JPY higher following Monday’s weakness in the wake of Japan escaping direct criticism at the G20 meeting in Moscow. Aso’s comments directly contradict those of PM Abe who has signalled that a joint Japanese fund to purchase foreign bonds in order to weaken the JPY was a goal. The contradictory comments highlight the high stakes here regards the PM fully implementing his aggressive policies known in the markets as “Abenomics”. We are very sympathetic with the concept that JPY weakness is largely driven by strong expectations of the Abe regime delivering on future policies rather than a reflection of significant change in policy to date. Our view remains that JPY weakness will be front loaded into the first half of 2013 but that a lack of new strategic policy will mean that the JPY strengthens again during H2 2013. Our favoured 2-year swap ratio versus USDJPY signals that the currency pair should be trading closer to 87 than the current 93.50. We would refrain from actively going short USDJPY currently given the pending announcement of the new (likely very dovish”) BOJ Governor but today’s developments are an important insight into the politics surround JPY direction in Japan.
– Improving eurozone surveys to support the EUR ahead of Italian election result
The release of the German ZEW provides a supportive backdrop for the EUR. The economic sentiment component, which reflects expectations over the next six months, surprised to the upside by rising to 48.5 (35.0 expected). Meanwhile, the current situation slid slightly to 5.2. For the EUR, we would focus on jump of the economic sentiment component as an indication that confidence in the eurozone economy is improving. This should provide support to EURUSD at current levels ahead of the eurozone ‘flash’ February PMIs on Thursday and the IFO business sentiment on Friday. We expect that improvements in these surveys should help the EUR to rebound over the weeks ahead, especially if the Italian election result on Monday confirms the consensus expectations of a coalition between Pierluigi Bersani’s PD and the party of outgoing premiere Mario Monti. We therefore view the current pullbacks in EURUSD as corrective and temporary, providing a buying opportunity. We expect EURUSD to rebound towards 1.3800 by the end of Q1.
– Swedish data supports less dovish Riksbank stance, but SEK appearing overstretched
The Swedish CPI release for January was in line with expectations with headline inflation remaining at 0.0 y/y while CPIF declined from 1.1 to 1.0% y/y as expected. Meanwhile, the unemployment rate surprised to the upside by remaining flat at 8% on a sa basis as opposed to market expectations of a slight rise to 8.2%. The unemployment data supports the Riksbank’s more natural policy stance and has provided ongoing support to the SEK. Nevertheless, we highlight that the recent rally in the SEK since the Riksbank meeting last week is starting to show signs of being overstretched. In particular, the 2 year Swap ratios for EURSEK and NOKSEK indicate that the crosses have been oversold – this indicator for NOKSEK points to the cross trading around 1.16. This suggests that NOKSEK and EURSEK may be supported around the current levels despite improving Swedish data.
BNP Paribas