Dollar On The Back Foot
The US dollar is starting the new week on the back foot, unable to fully shake off the effects of Friday’s softer than expected US housing data. The retreat in February new home sales to a 313k annual rate fell short of the 325k consensus, while the January sales print was revised lower by 3k to 318k. While the level of unsold inventory remains low and median prices rose 6.2% y/y, it may take positive US data surprises and/or less dovish ‘Fedspeak’ to embolden the USD bulls. USDJPY continues to look rather heavy in the face of the softer US yield profile, with the focus remaining on the domestic fiscal debate and BoJ Policy Board nominations. The budget bills are delayed and the proposed consumption tax hike continues to face stiff resistance; such uncertainty will only serve to cloud Japan’s macro outlook and sustain the pressure on the BoJ to buy more JGBs in the absence of any other stimulus measures and structural fiscal reform. Meanwhile, the government’s nomination of private sector economist Ryutaro Kono as a candidate to replace Seiji Nakamura on the Policy Board has drawn criticism from some members of both the ruling DPJ and opposition LDP, casting doubt over whether the necessary Diet approval will be secured. Irrespective of how this succession drama plays out, the existing thrust of BoJ policy is unlikely to be materially altered. Political pressure for further easing will remain as strong as ever, Governor Shirakawa has not ruled anything out, and Fed-BoJ policy divergence should become more pronounced in coming months. Stay on guard for additional BoJ easing via the APP as early as next month – possibly coinciding with the release of the Bank’s next Outlook Report on April 27, just days after the FOMC meeting. The EU’s Rehn offered reassurances over the weekend that officials “will take a convincing decision on the reinforcement of the firewalls” ahead of the finance ministers meeting on March 30, but the euro will be closely watching any reaction by the ratings agencies – not to mention Spanish yields and further post-PMI signs of weakness in the German IFO data for March due out later today. UBS expects all IFO indices to fall marginally.
Click here to read the full report: UBS Morning Adviser Asia
UBS Investment Bank