DAILY MARKET COMMENTARY
19 April 2012 – 8:00 GMT
Thursday
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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
Trading was subdued in Asia overnight given a light economic data calendar, but investor attention is noticeably turning to what next week's two policy meetings will bring. The FOMC and the BoJ policy decisions are likely to set the tone for USDJPY for months to come, and USDJPY is already creeping higher in anticipation. BoJ Governor Shirakawa fanned expectations overnight by saying he is 'committed' to continued monetary easing in order to meet the 1% inflation goal. He also sounded quite downbeat about the general economic outlook, noting Japan has "stagnated" and that growth in developed economies elsewhere is "anemic". There was nothing in these remarks to dampen our expectations of further easing at the next policy meeting on April 27.
The Bank of Canada has other intentions - it backed up Tuesday's warning that "some modest withdrawal of the present considerable monetary policy stimulus may become appropriate" with an upgraded 2012 GDP forecast of 2.4% (versus 2.0% previously) in its Monetary Policy Report. This underpins our generally bullish Canadian dollar view and three-month USDCAD target of 0.98. Together with the Bank of England turning considerably less dovish while the RBA signals a possible upcoming rate cut, central bank opinion has not been so diverse in quite some time.
Today, the euro is likely to be highly sensitive to any surprise emerging from today's sovereign bond auction in Spain. Our rates strategy colleagues think the small amount (EUR 1.5 bn-2.5 bn) of bonds being sold is likely to be comfortably absorbed by the market.
EUR
IMF Managing Director Lagarde said that member countries have so far committed $316 bn in additional lending capacity to the fund. We expect further news over the coming days as the Spring meetings of the IMF and World Bank come to an end.
Italy has followed Spain in pushing back its balanced budget goal, as it now expects a deficit of 0.5% for 2013 against a previous estimate of 0.1%. Prime Minister Monti announced that the economy is likely to shrink by 1.2% in 2012, far more than government's earlier forecast of -0.4%.
In its Global Financial Stability Report, IMF noted that European banks could shrink their balance sheets by $2.6 trn over the next 18 months, with the bulk of the deleveraging happening through the sale of non-core assets while credit supply drops by 1.7%. This will likely reawaken investor discussion about how repatriation flows from the sale of overseas subsidiaries could lend the euro some support, or at least result in a more gradual decline than would otherwise be the case.
Non-performing loans as a proportion of total lending in Spain jumped to 8.16% in February - the highest level since 1994, and up from 7.91% in January and less than 1% in 2007.
JPY
BoJ Governor Shirakawa said he is 'committed' to continued monetary easing to meet the 1% inflation goal. He also sounded quite downbeat about the general economic outlook, noting Japan has "stagnated" and that growth in developed economies elsewhere is "anemic". There was nothing in these remarks to dampen our expectations of further easing at the next policy meeting on April 27.
Japan's trade deficit continued into March. Imports grew faster than exports. Interestingly, exports to the US rose +23.9% y/y while exports bound for Europe fell -9.7% y/y. This is further evidence of a strengthening US recovery while Europe struggles under the weight of fiscal consolidation, and it supports our 1.25 3m forecast on EURUSD.
GBP
The April BoE minutes revealed that the MPC voted 8-1 to keep QE unchanged and 9-0 for an unchanged policy rate. Adam Posen , the staunch dove, changed his vote and voted in line with the majority. The sole voter for further QE was David Miles, who said that his was a "fine decision". This marks an important turnaround inside the BoE, with Posen having hinted about his change in stance yesterday. The initial market reaction was to buy GBPUSD and sell EURGBP - we would favour playing this change by selling EURGBP further.
The recent uptick in UK CPI was one of the main drivers behind the change in stance. In Q1, inflation averaged at 3.5% instead of the MPC forecast of 3.35%, and it is clear that the hawks inside the BoE are now having an increasing influence. Our UK economics team notes that the underlying drivers of inflation, such as money growth and wages, are expanding at a modest rate and inflation has very frequently overshot the BoE's forecast in the past. Overall, the minutes support our view that the BOE will not expand the QE programme in May.
In a separate interview, the BoE's Tucker suggested that the Bank is getting worried about inflation, a theme which was also clearly reflected in the meeting minutes.
AUD
Prime Minister Gillard looked ahead to the upcoming budget, noting that fiscal restraint on the part of the government would make room for the RBA to cut rates. AUD did not react.
A. White
Analyst at Fibosignals.com
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