FX Daily Strategy: N America, January 10th

Scandis steady after barrage of data
EUR/USD unimpressed by firm EUR yields
JPY needs to see a rise in risk premia to make gains on the crosses.

There was lots of Scandi data this morning. The Norwegian CPI numbers were slightly on the soft side of expectations, but Q4 core CPI is only marginally below the Norges Bank forecast of 5.8% published in the December Monetary Policy Report. Norges Bank in that report also indicated that they were likely to keep rates steady in Q1.  EUR/NOK is not much changed on the data, but we still prefer the downside medium term, with there still being some scope for yield spreads to move in favour of the NOK, and EUR/NOK starting at a point that still looks a little high relative to the historic yield spread correlation.

EUR/SEK is also little changed after a barrage of Swedish numbers, which don’t really give a clear view of the progress of the Swedish economy. The 0.2% rise in November GDP is notable after the (unrevised) rise of 1.0% in October – this makes the growth picture for Q4 look encouraging. But these monthly GDP data are quite unreliable, and the other data released this morning – confidence, industrial production, new orders and retail sales – generally suggest weakness, with the exception of a better new orders number. EUR/SEK has fallen in recent weeks back to a level that looks consistent with yield spreads, so we wouldn’t look for a significant move. However, NOK/SEK still looks to have upside potential medium term, though today's data are unlikely to trigger a move.

There isn’t a lot else on the calendar, and the market focus is shifting towards the US CPI data on Thursday. The USD showed a slightly firmer tone on Tuesday, with EUR/USD pressing towards the bottom end of the recent 1.09-1.10 range, even though EUR yields remained firm and suggested some upside risks. This was in spite of significantly weak German production data on Tuesday, which followed weak orders data on Monday. Admittedly, the Eurozone unemployment numbers were more encouraging, showing a decline in the rate, but we find it hard to trust the firm tone to EUR yields, and would not expect a significant bounce above 1.0950 in EUR/USD.

The JPY managed to make some modest gains on the crosses through Tuesday, but these came more because of soft risk sentiment than any move in yield spreads. Certainly, equity risk premia have been a more reliable guide to EUR/JPY in recent years than the yield spread, with the yield spread clearly suggesting downside risks. However, a significant rise in risk premia may be needed for the JPY to manage gains on the crosses.