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December 18, 2012
From Lloyds Bank

ON BULLETS

• Obama and Boehner edging closer to fiscal cliff deal

• Nikkei reports LDP planning large scale economic stimulus

USD The USD has remained under pressure against most currencies except the yen in the last few days, not obviously because of any progress or lack of progress on the fiscal cliff, or any real strong risk bias in other assets. The moves seem to have been more JPY cross driven than anything, and the USD has weakened as a result, especially against the EUR where positioning was probably most exposed.

Today sees the US current account release, and although this tends not to be a major market mover, there has been increased talk of an improving US oil balance going forward which may be seen as USD positive. But the tone is still most likely to be set by JPY cross movement. The USD index still has decent support in the 79.50 area, but expect a test of 79 on a break.

EUR EUR/JPY strength has been primarily responsible for the strength of the EUR in recent days, and we would consequently be a bit wary of looking for an extension of EUR gains ahead of the BoJ meeting on Thursday. However, the March highs in EUR/JPY at 111.44 have still to be taken out, and it is likely there would be some further stop related EUR buying on a break of this level.

With the Japanese election gap on the charts closed yesterday, there could still be another push to the upside, but with no significant Eurozone news due we wouldn’t be looking for a break higher ahead of Thursday’s BoJ meeting.

GBP We expect today’s CPI data to show a modest rise to 2.8% y/y, slightly higher than the market anticipates, but this should have very limited market impact as Bank of England policy seems unlikely to be influenced by current inflation at this stage. As we have argued before, impacts from things like higher utility bills are, if anything, a reason for more rather than less stimulus, so should really be seen as sterling negative. In practice, as with the EUR, GBP/JPY remains a big driver, and the Japanese election gap on the charts is likely to be closed before any break higher, so 135.10 should attract, providing a slightly GBP negative bias.

JPY The surge in USD/JPY on the Japanese election result was a little surprising given that the LDP win had been well flagged, but the fact that Abe is keeping the pressure up on the BoJ is still being seen as JPY negative. However, with or without more BoJ action, an extra fiscal stimulus package could turn out to be JPY positive if it boosts growth and asset prices in Japan, so we remain wary of assuming JPY weakness extends far from here.

Spotlight – Little upside for EUR/SEK on Riksbank decision – With the market pricing in around a 90% chance of a Riksbank rate cut today, there is little reason to expect any significant rise in EUR/SEK if the Riksbank do cut as expected. As the chart below shows, there hasn’t been much deviation from yield spreads in the behaviour of EUR/SEK in recent years, and with positioning probably now much squarer after the recent rise in the EUR, it is unlikely that today’s decision will make a lot of difference in itself.

The focus will be more on the future rate path guidance. On the face of it, this could be brought down further if, as expected, rates are cut again today, but unless there is an indication of more potential downside, the probability that they will show an upward path from here suggests that any SEK sell off will be short lived.

To read the full report, visit Lloyds Bank website here.