From the FXWW Chatroom; This morning the USD is broadly weaker across the board, in sympathy with the US curve moving lower and flatter, with EURUSD rising above 1.0650 and USDJPY below 113.50. In an interview with the Wall Street Journal last Friday, US President-elect said the USD was probably “too strong” and also that the proposed “border adjustment” tax plan (which the market views as likely to be very USD bullish) is too complicated. Our short-term fair value model, BNP Paribas STEER™, continues to signal short USDJPY currently targeting 112.70. On Thursday, the ECB press conference may note further improvement in activity and reduced downside risks. However, our economists expect the ECB to remain very wary of fueling premature speculation about an end to QE. With the ECB emphasizing a preference for sticking with the plan and ongoing asset purchases capping nominal rates, stronger activity data in Europe is likely to keep real rates low, leaving the EUR vulnerable. We remain positioned for EURUSD downside via a EURUSD ratio put spread with KI (buy 1x 1.05, sell 2x 1.03 with 1.0150 KI) (14-Feb expiry).
Commodity bloc vulnerable after strong start to the year
We think both AUDUSD and USDCAD are at risk to a resumption of USD strength or a turn weaker in the global risk environment. The CAD has additional vulnerability heading into this week’s Bank of Canada meeting. Our economics team thinks the Bank will deliver a final 25bp rate cut this week as the Bank seeks to avoid a tightening of financial conditions while activity remains soft, in contrast to market pricing and consensus forecasts calling for unchanged policy. If a rate cut is delivered, we would expect USDCAD to move quickly towards our 1.36 three-month target, but even steady policy will leave the CAD vulnerable in the context of gradually rising US rates. We remain positioned for USDCAD gains via a 1.34/1.36 call spread recommendation.
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