DAILY MARKET COMMENTARY
18 April 2012 – 8:00 GMT
Wednesday
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Market Analysis Desk
Foreign Exchange Research: www.fibosignals.com/5585/resources.html
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FUNDAMENTAL ANALYSIS at 0800 GMT
WORLD
The yen weakened overnight despite a press report indicating that the Bank of Japan's inflation forecasts may be raised. It seems some FX investors are already positioning themselves for USDJPY upside ahead of next week's FOMC and BoJ meetings - both of which are likely to push the pair higher towards our 3m forecast of 85.
Elsewhere, our bullish call on the Canadian dollar was supported by the more hawkish posture of the Bank of Canada, which warned that "in light of the reduced slack in the economy and firmer underlying inflation, some modest withdrawal of the present considerable monetary policy stimulus may become appropriate". This anticipated shift was the key driver of our USDCAD forecast revision last week (to 0.98 from 1.03 on a three-month horizon). Note that we are also long a CADCHF call spread.
The statement tees up a possible upgrade to the GDP forecast in the Bank's quarterly Monetary Policy Report due later today. The more hawkish stance of the Bank of Canada certainly stands out at a time when most other major central banks are retaining an easing bias.
Later today, the BoE minutes will be closely monitored for any fresh insight. While a unanimous decision is expected on rates, we expect a 7-2 vote split on QE, portending a close decision at the May MPC meeting. For the record, our UK economics team believes the MPC will not expand the QE programme next month in the face of inflation figures that continue to exceed the BoE's forecast, but the upcoming Q1 GDP data and Eurozone developments could still have a significant bearing on the debate. The Riksbank meets today and we expect the repo rate to be left unchanged, though the policy statement will likely be fairly dovish, with little inflationary pressure inside Sweden.
EUR
French Socialist candidate and the front-runner in the presidential elections, Francois Hollande, called on the ECB to lend directly to member states with debt troubles. Earlier, Hollande said he wanted the ECB to have a dual mandate of growth and inflation.
The IMF upgraded its Eurozone growth projections for 2012 (to -0.3% from -0.5%) and 2013 (to 0.9% from 0.8%), but asserted that "the ECB should lower its policy rate while continuing to use unconventional policies to address banks' funding and liquidity problems".
Spain's bill auction went reasonably well and more than the target size was sold. Though the yields were higher than those seen previously, spreads versus Germany tightened.
The German April ZEW survey was solid, with the current situation index rising to 40.7 from 37.6 and the economic sentiment index advancing to 23.4 from 22.3. This is the fifth consecutive rise. Eurozone CPI for March was revised up to 2.7% y/y versus the 2.6% preliminary figure.
Efforts continue behind the scenes to increase the IMF's crisis-fighting firepower ahead of this week's IMF and World Bank meetings. Denmark, Norway and Sweden pledged a total contribution of $26 bn. Japan has already announced that it will increase its contribution by $60 bn, while Eurozone central banks have already promised about $200 bn. The US so far has refused to chip in more money and the intentions of BRIC countries are still unclear.
JPY
The Nikkei newspaper reported that the Bank of Japan is poised to raise its inflation forecast as part of its quarterly outlook review at its next policy meeting on April 27. According to the article, the new 2012 forecast will be in the range 0-0.5% y/y (prev. 0.1%) and the new 2013 forecast will rise to "somewhere between" 0.5% and 1% y/y. We note that this would still most likely leave inflation below the BoJ's new medium term inflation goal of 1% and still providing ample justification for additional easing.
BoJ Deputy Governor Nishimura said the BoJ's actual future steps would depend on the outlook for the economy, for prices and other risk factors.
GBP
UK March CPI surprised to the upside, rising 0.3% m/m and 3.5% y/y . The ultra-dovish Adam Posen said it is important not to judge inflationary pressures on one month's print, but noted that the Bank is watching inflation closely. This marks somewhat of a turnaround from Posen, who has in the past spoken more about deflationary risks to the UK.
A. White
Analyst at Fibosignals.com
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