– FX markets continue to punish the printers
The view taken by FX markets has been to punish the printers (JPY, CHF and GBP) but excuse the USD (despite the Fed’s printing press) given improved cyclical data. Expectations for further (and earlier) easing from the BoJ and much weaker UK manufacturing production (-1.5% m/m vs. 0.0% consensus) should weigh on JPY and GBP respectively. GBP looks vulnerable with BNP positioning analysis showing short GBP positions, though not yet extreme (at -21 vs. -30 for both CAD and JPY. Meanwhile, CHF should remain under pressure with the SNB likely to re-affirm the current expansionary policy stance at their meeting on Thursday. Better bill auctions from Spain (above target sale today) and Italy should further weigh on CHF. We maintain a long EURCHF trade recommendation, targeting 1.2800. Collectively the G10 low yielders (JPY, CHF and GBP) could continue to remain under pressure given the continued rise in US yields (10Y now at 2.05%), with supply weighing this week; 3Y today, 10Y Wednesday and the 30Y on Thursday. Meanwhile, the EUR and commodity bloc are stuck in a rut; strong on the crosses, but weaker against USD. Our bias is for the commodity bloc (especially CAD) and EUR to weaken vs. USD from current levels. The Italy-German 10Y spread at 312bps (below 345bps peak last week) suggests EURUSD should be closer to 1.3250 vs. 1.3050 now.
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BNP Paribas