Daily Forex Focus – 17 January
Sentiment improved overnight, primarily on the back of stronger headline Chinese GDP growth of 8.9% y/y (cons: 8.7% y/y), consistent with our view that China is seeing a steady slowdown rather than a “hard landing”. The ensuing price action has been largely a one-way street, and as we head into the London open, S&P futures are up 0.6%, Asian bourses are all in positive territory, bond yields higher (AU10s up 12 bps), and in FX, USD and JPY are underperforming the G-10, while AUD is outperforming (up 60 pips to 1.0399). EUR is also squeezing higher, up 82 pips to $1.2748 and over 125 pips from the Monday low.
Day ahead: European developments will provide the overall backdrop for risk sentiment. Particular focus will be on Portugal following the very poor price action yesterday and the EFSF’s 6-month bill sale following yesterday’s downgrade to AA+. Elsewhere, the macro highlights are UK CPI the BoC rate decision and the US Empire State manufacturing survey (cons: 11, from 9.5). US earnings reports from Citi and Wells Fargo are also worth keeping an eye on.
EUR/USD: As well as the better Chinese data, EUR’s squeeze was also supported by the decision by S&P Ratings to affirm EIB at AAA, contrary to some speculation of a downgrade. EIB was taken off credit-watch and put on negative outlook. Meantime, Japanese FinMin Azumi continues to ‘jawbone’ EUR/JPY higher. Datawise, today’s German ZEW expectations index is expected to recover from -53.8 to -49.4. However, we stress that the ZEW is not a particularly reliable leading indicator for GDP growth, when compared to the PMIs or the IFO survey (out next week). Markets.com and consensus expect Dec CPI inflation of 2.8% y/y, with modest downside risk. Finally, although the Moody’s deadline for the review of France’s outlook was today, they appear to have bought more time, announcing yesterday that they will now combine the review on the outlook with the review on the rating and update the market at some point in Q1.
EUR/JPY: FinMin Azumi stated overnight that the EFSF downgrade would not immediately change Japan’s stance on purchasing EFSF debt and that he wants to examine current FX moves before deciding on whether to intervene in EUR/JPY. His comments are in the context of the Japanese government maintaining its economic assessment in January, but downgrading its view on exports for the first time in three months due to slowing global growth.
CAD: Gave up some of its recent gains on the crosses ahead of the BoC rate decision today. AUD/CAD is up 60 pips to ~1.0550 and EUR/CAD is up ~45 pips to ~1.2925. The BoC is universally expected to leave the overnight rate at 1.00%, so the focus will be on its forward-looking guidance. Growth and inflation have been stronger than its forecasts, but the counterbalance is the lower global growth outlook. We expect the BoC is on hold until Q4, at which point we expect a 25 bps hike. The OIS curve has ~50% probability of a 25 bps cut discounted within the next six months.