DAILY MARKET COMMENTARY
9 April 2012 – 8:00 GMT
Monday
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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 dollar had a surprise recovery overnight, and quickly reclaimed all ground lost to the euro after Friday's weak US payrolls. However, flows were light as New Zealand, Australia, and Hong Kong remained closed. A stronger-than-expected China CPI failed to generate much interest, and allowed AUDUSD to take the news largely in its stride. Our core bullish dollar view is unchanged; we still expect the Fed to gradually back away from QE3 as other major central banks maintain an easier bias, likely ensuring outperformance of the US dollar over other majors this year.
Our analysts stress that the soft 120k US nonfarm payrolls print for March reflected 'payback' due to weather effects rather than fundamental weakening, with the earlier weather-related boost to payrolls now fully reversed. While the dip in the jobless rate to 8.2% in March from 8.3% in February came on the back of a 164k drop in the labour force, one should not lose sight of the pick-up in earnings growth amid improved job quality, as average hourly earnings rose 0.2% m/m (2.1% y/y).
USDJPY will also be sensitive to the risk of further easing in Japan, with the BoJ kicking off its two-day meeting today. Granted, we see greater odds of action on April 27 than April 10, but any disappointment on a 'no change' verdict this week should be limited by the dovish signals emanating from Japanese officials. Come April 27, the BoJ should be better placed to ease, having (i) seen the results of the FOMC's deliberations on April 24-25, (ii) adjusted its own macro forecasts and risk assessment, and (iii) possibly restored its full complement of 9 voting members. The mere fact that Ryutaro Kono's nomination for the Policy Board was rejected by the Upper House on the grounds that he simply was not dovish enough underscores the strong political pressure on the BoJ to ease further - a JPY5 trn boost to the APP would be a good start, while a removal of the self-imposed maturity guideline on JGB purchases would magnify the effect further. The bottom line is that any further USDJPY pullback towards 80.00-80.50 would provide attractive re-entry points for dip buyers. Fed Chairman Bernanke's speech today is not expected to address monetary policy.
EUR
Spanish yields are very likely to remain in focus this week, along with any negative spillover effects into the Italian bond market. Last week's disappointing Spanish auction has raised fresh doubts about the domestic banking system's willingness and capacity to absorb forthcoming sovereign supply, and our rates strategists remain concerned about a structural shortage of demand for sovereign debt issued by Europe's periphery.
Our analysts are generally impressed with the ambition of last week's budget in Spain, but are wary of the economic contraction this will induce. They also have some doubts that the announced measures will be enough to hit the deficit target of 5.3% of GDP in 2012.
Japanese Finance Minister Azumi confirmed over the weekend that Japan would hold high-level talks with China over contributions to the IMF to help address the Eurozone crisis ahead of the G20 meetings in Washington on April 20-22. Azumi said "Europe's problem has eased from a critical situation seen last year, but it is not a situation where we can be optimistic. We need to watch the situation cautiously".
JPY
Current account and trade balance details released overnight were broadly in line with expectations, and USDJPY was unmoved.
Former BoJ Deputy Governor and current head of the Japan Center for Economic Research Kazumasa Iwata said in a Reuters interview on Friday that "February's action was a regime shift in the sense that the BoJ set a flexible inflation target. I think markets believed so, too". He argued that "the central bank must now make efforts to achieve the target as soon as possible", adding "the BoJ should abandon a limit on the maturity of bonds it accepts under its asset-buying programme" and "central banks faced with zero interest rates are all buying government bonds, and there's nothing wrong with that". Iwata, now a member of a government panel to advise on a longer-term growth strategy, also said that once the BoJ's goal of 1% inflation is in sight, it should raise its objective to 2%.
Regarding Japan's economy, Finance Minister Azumi said "the nation's domestic demand is improving considerably thanks to reconstruction demand. There have been various factors such as a strong yen and higher oil prices, but Japan's corporate fundamentals are not bad".
A. White
Analyst at Fibosignals.com
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