– EUR still favoured on the crosses
EURUSD’s preferred bias remains on the topside as its crosses (EURGBP and EURCAD) are well supported. The release of the German ZEW survey yesterday, which rose to 48.5 (35.0 expected), is arguably a positive sign ahead of the more important eurozone ‘flash’ February PMIs on Thurs and Germany’s IFO business sentiment on Fri. Any pullbacks in EURUSD are likely to be brief and corrective, with support from the November bullish daily trendline at 1.3280. We expect EURUSD to rally to 1.3800 by the end of Q1. Meanwhile, EURGBP received a boost from rumours of a UK rating downgrade. The markets remain focused on the prospects for the BoE to become the ‘new BoJ’ in shifting to a policy stance that is more tolerant to inflation. While our valuation models suggest the GBP move is overdone, we suspect the pressure on GBP will persist for now. Neither the BoE minutes nor the January jobless claims (we expect a gain of 5k) both due out later today should change that near-term dynamic. We also continue to monitor EURCHF which remains our preferred way to express a bullish EUR view at the moment (a long trade recommendation established at 1.2305 and targeting 1.2800). SNB Chairman Jordan reiterated the current stance yesterday that slight CHF depreciation was welcome, the FX floor will remain in place for the foreseeable future, and that authorities were ready to take further measures if needed.
– USDJPY stalls in a range for now
Japan printed a record JPY 1629.4tn trade deficit in January, more than the expected -JPY1.375tn and much wider than – JPY 641.5bn prior. This marks the seventh month of deficit and suggests that pressure on the BOJ to conduct more aggressive monetary easing is intact. A consolation though was that exports rose for the first time in eight months at a faster than expected pace of 6.4 vs. 5.6% expected following a 5.8% fall in December, while imports remain robust, rising 7.3% YoY against forecast of 2.1% and after a 1.9% gain prior. PM Abe meets President Obama on Friday, with more clarity on the next BoJ Governor likely to follow next week. According to Yomiuri newspaper reports, Prime Minister Abe has narrowed the selection to four candidates — namely, Kazumasa Iwata, Kikuo Iwata, Haruhiko Kuroda and Takatoshi Itoh — for next BoJ governor before he brings up to the Diet next week. Surprisingly, Toshiro Muto, an ex BOJ and MOF official, previously flagged in a Reuters report as the leading contender was ruled out by Abe as a potential candidate. This should be comforting for JPY bears as Toshiro Muto is considered to be a less dovish candidate and he does not support foreign bond purchases. 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. The JPY should also take some cues from US data/yields this week. Following a weaker print on the NAHB homebuilders survey, soft January housing starts today (we expect a 4.6% m/m decline) could put some downward pressure on USDJPY.
– AUD and CAD parting ways
AUD and CAD have diverged this week – AUD received a moderate boost from hints of optimism in the RBA minutes, while CAD has been under downward pressure (mainly via gains in EURCAD). Foreign investors sold a net of CAD 1.92bn in Canadian securities in December – the first outflow since June. Although Canadian retail sales and CPI should not offer much support to the Canadian currency later this week, we see USDCAD as increasingly overextended above 1.0135 (a 61.8% retracement of the June-September move). Some of the CAD’s underperformance has been due to the Canadian oil prices underperforming the benchmarks, but the WCS-Brent spread has been narrowing lately. We maintain a long CADNOK trade recommendation, targeting 5.75.
BNP Paribas