JPM – FX Weekly Update – Weekly Currency Thought: Mixed forces weighing on the Australian dollar at this point

The slight downward adjustment seen in US short-term rates (see 2 year US yield trading back towards 0.35% from 0.4% a few weeks ago) has conditioned a softer week for the USD last week. The USD TWI is down roughly 1.6% from this month’s high and the recent price action is in line with our view that we have moved back to a more conventional approach on the USD, with a positive correlation with US macro-economic news resurfacing. In the event, last week’s Feb housing data were arguably not as strong as what was hoped for on the headlines, but we note that including the Jan. upward revisions, the marginally more upbeat housing story is intact. This week, we have fresh housing data (Feb. pending home sales), the Feb. durable goods orders, March Chicago PMI, Michigan confidence index and Q4 GDP due. The latter is expected at a strong +3% (a.r), USD bullish in theory. In practice, the impact may be short-lived as Q4 will be seen as ‘old news’. We have a few Fed members due to speak this week, including Fed’s Bernanke.

EUR: Continued resilience, but watch out the macro

We have been suggesting that with Greek jitters out of the way (for now), the euro would become increasingly sensitive to the domestic macro economic news. This was a correct assumption, but we note that recent economic releases have erred on the soft side of our expectations (see in particular last week’s PMI surveys), taking the euro back towards the lower end of its recent trading range early last week. This week, it will be all eyes on Germany’s March IFO survey. The (somewhat unexpected) outperforming nature of Germany’s economy has been a reassuring force (and arguably a euro bullish force) early this year. Sustained strength in Germany’s economy is a central assumption in our still relatively constructive Q2 EUR/USD outlook. The March IFO index is expected marginally higher for the 5th consecutive month (at 109.7 from 109.6) which would be consistent with a positive Q1GDP. We noted a fairly positive
price action on the euro late last week and identify resistance at 1.3350 and 1.3450 (support at 1.3150).

TRY: CBRT takes centre stage this week

The recent TRY price action has been disappointing, but we may get some relief from the monetary authorities, with the CBRT’s recent message showing a strong commitment to containing further lira weakness. This week, rates are expected to be left on hold (at 5.75%) at the regular CBRT meeting, but we note that recently, the central bank has been cancelling some of its 1-week repo auctions (at 5.75%). The impact has been a gradual rise in the overnight effective funding rates, hence a tightening in monetary conditions. In theory this should help the lira. Should this not work, the CBRT could also opt to open intra-day US$ selling auctions and become more interventionist. Note that a weaker lira is clearly not welcome at a time of rising price pressures – see Feb. CPI at a high 10.4% y/y. TRY bears would have noticed a deteriorating Jan. C/A position, but this was strongly biased by soaring oil prices whilst the resumed strength in capital inflows is reassuring.

JPY weakness: It is not over yet

Pull-backs are feasible considering the large moves of the past few weeks but we are of the view that the bearish yen play is not over yet. We believe that for as long as the overall risk climate remains supportive, the yen should be seen as a good sell on rallies. The real test to the bearish yen view would resurface in a risk-off context. Considering the current market mood and the very strong recent momentum, we would argue that the time is nearing when negative Japanese data add on to the bearish yen case. Beside the deteriorating C/A position; this week, it is the latest CPI that should generate most interest. Any further fall into deflationary territory could fuel expectations of a plausible rise in the BoJ’s 1% inflation target and/or of additional QE, all yen bearish. We note however that last week’s nomination of Kono as new BoJ member could weaken the case for an imminent rise in the target as the latter is known for favouring a conventional approach to monetary policy.

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