FUNDAMENTAL OUTLOOK at 0800 GMT (EDT +0400)
WORLD
USDJPY consolidated overnight with FOMC and BoJ policy meetings drawing closer. Our analysts are not concerned about yesterday’s higher-than-expected initial jobless claims data. Instead, they point to distortions associated with Easter holidays and the cross over to a new quarter, which led to volatility and an upside bias. Economic data elsewhere also disappointed: existing home sales fell to an annual rate of 4.48 mn and April Philly Fed manufacturing index down to 8.5.
Meanwhile, Bank of Japan remains under intense political pressure to ease again. Economy Minister Furukawa urged the BoJ to take steps to achieve its 1% price goal for the second day in a row. He explicitly pointed to the option of buying JGBs with longer maturities, a possible policy outcome that could be particularly yen-negative. The key deciding factor could well be the growing political pressure on BoJ for more concessions as Noda administration battles to get the consumption tax hike passed in the Diet. Implicit here is the gradual Fed-BoJ policy divergence that should keep USDJPY risks tilted upwards to 85 in a three-month horizon amid a fading ‘home currency bias’ among Japanese investors.
While the Fed will be in no rush to categorically rule out QE3, we maintain the case for further easing is less convincing in the US than Japan. Ahead today, the focus will be on the IFO numbers in Germany and the G-20 meeting of finance ministers and central bank governors in the US. Canadian CPI numbers will be particularly noteworthy after the bank adopted an explicit tightening bias earlier this week.
EUR
The much anticipated Spanish auctions were largely uneventful. The Treasury managed to sell EUR1.2 bn of the 2014′s and 1.42bn of the 2022′s – at the upper end of targets. The bid-to-covers were also reasonable, coming in at 2.42x on the 10-year bond. The euro rallied after the results were released, but soon ran out of steam after breaking through 1.3150.
Japan‘s Finance Minister Azumi said there is a high chance the IMF will succeed in raising nearly $400 bn in funding pledges by the time the Spring meetings of the IMF and World Bank come to an end over the weekend.
JPY
Japan’s Economy Minister Furukawa – for the second day in a row – said that the BoJ has the option of buying JGBs with longer maturities, and he expressed the hope that the bank will consider taking steps to achieve its 1% price goal. As such, political pressure on the central bank remains fierce and we would expect no respite ahead of next week’s policy decision.
Though the tally was rather modest at JPY116 bn, the fact that the Japanese were net foreign bond buyers to the tune of JPY116 bn from April 8-14 reinforces our view that the large net sales (JPY1.9 trn) recorded in the first week of April reflected profit taking rather than the start of a sustained retreat from overseas markets. Bear in mind that Japanese investors have been better buyers in 12 of the past 15 weeks, chalking up cumulative net purchases of over JPY6 trn in the January-March quarter alone – defying seasonal fears of repatriation ahead of the fiscal year-end. Fed-BoJ policy divergence aside, our stronger USDJPY call hinges on our assumption that the strong ‘home currency bias’ evident in 2011 will gradually fade this year, as Japanese retail and institutional investors search for better returns abroad – complemented by increased direct investment flows overseas.
GBP
In a letter published in The Independent (“Why I changed my vote”), the BoE’s Posen argued that his vote for no change at the latest MPC meeting “really should not have” surprised anyone, highlighting his belief that “the risks are largely balanced around inflation being below but close to target over the forecast horizon”. Posen noted that he “never was an automatic vote for more QE” and “the latest data convinced me that for now an additional ?25 billion could be unnecessary”. Posen concluded by saying “neither the MPC nor markets should overreact to one month’s number, nor even to one vote. We will make a forecast that makes best sense of current conditions, and vote accordingly, whether that is for more QE or not”.
Posen went on to echo a sentiment often expressed by Fed officials. He said that the degree of accommodation at a given moment depends on the stock of accumulated bond purchases to date, rather than on the flow of additional purchases. His point is that Bank of England policy settings will remain extremely accommodative even if fresh asset purchases do not continue beyond the end of April – when the existing asset purchase target is expected to be reached.
AUD
Australian export prices fell more sharply in Q1 than the consensus expected. They dropped -7% q/q in Australian dollar terms.
TECHNICAL OUTLOOK at 0800 GMT (EDT +0400)
EURUSD BEARISH Initial support lies at 1.3058, a move below would signal resumption of weakness towards 1.2974/54 area. Resistance is at 1.3213.
USDJPY NEUTRAL A clear break through 81.78 would be a bullish development signalling scope for further gains towards 82.24. Support is at 80.84.
GBPUSD BULLISH Key resistance is at 1.6090, a break above would open the doors for a move towards 1.6167. Support lies at 1.5950.
USDCHF NEUTRAL Initial resistance is at 0.9252, a move above would open 0.9335. Support lies at 0.9092 ahead of 0.9002.
AUDUSD BEARISH Trend conditions are bearish; there is scope for a move towards 1.0226. Resistance is at 1.0471.
USDCAD BEARISH Key support lies at 0.9842, a break here would be a bearish development. Next support is at 0.9766. Resistance is at 1.0053.
EURCHF NEUTRAL Resistance is at 1.2049 ahead of 1.2070, while support lies at 1.2000.
EURGBP BEARISH Focus is on support at 0.8142; a break here would extend weakness towards 0.8068. Resistance is at 0.8222.
EURJPY NEUTRAL The cross pressures 107.47, a break above would resume strength and opens 108.04. Support is at 106.11 ahead of 105.29.
SCHEDULE
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