Bernanke Weakens USD
Those hoping for less dovish commentary from Fed Chair Bernanke were mostly disappointed. Although he acknowledged the recent “genuine improvement” in the labour market, he again emphasised that the situation is still “far from normal”. What hurt the dollar most was Bernanke’s view that “continued accommodative policies” could help boost employment. This is a marvelously vague remark and open to interpretation. While it does not endorse the market’s recent decision to price in a rate hike as soon as in late 2013, it does not rule it out either. Furthermore, as our US economists point out, “continued” accommodation does not mean additional accommodation. As such, Bernanke was non-committal about the possible need for further asset purchases without ever mentioning the policy explicitly. The market chose to focus on the lower-for-longer interpretation however, and this provided a positive kick for risk appetite. Among the commodity currencies, we continue to favour the Canadian dollar on the premise that the Bank of Canada may become less dovish sooner than the Fed. We keep our bullish view on USDJPY too. With the new fiscal year starting next week in Japan, risks should be skewed towards further yen weakness, as yield-hungry Japanese investors look for investment opportunities overseas and the BoJ tees up further easing; April 27 is one potential window for action, coinciding with the release of the Outlook Report. However USDJPY vols are already extremely well bid ahead of the BoJ’s April 10 meeting – by which time two new board members may have already been appointed provided parliament can decide who to pick. Despite the recent setback, we remain fundamentally bullish on the USD, taking comfort from the fact that Bernanke did not hint at further easing. Our take is that the US recovery will be sufficiently durable to prevent the Fed from adopting QE3, as small firms are feeling better, payrolls should continue to expand, credit activity is improving, core inflation is likely to tick higher, and house prices are stabilising. On the latter, we would not read too much into the soggy January S&P/Case Shiller (SP/CS) Index expected later today. Distressed sales are having an increasingly negative effect on broader measures of home prices such as the SP/CS reading; the rise in non-distressed housing prices provides a more reliable barometer of underlying trends.
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UBS Investment Bank