QE3 Prospects Dim
The dollar rallied strongly in the wake of the FOMC minutes – EURUSD fell from 1.3340 to 1.3320 and USDJPY surged towards 83 as it became clear that the Fed is some distance away from pushing for fresh stimulus. This stands in contrast to the impression markets received after Chairman Bernanke’s March 26 speech, and it appears that not all FOMC members even agree with the Chairman’s assessment on the labour market itself. Overall, our economists note that the minutes have laid a marker for eventual altering of the ‘late 2014’ guidance for the FOMC, though material movements are needed both on growth and inflation, or even the fiscal situation in the US, to ultimately achieve revision in their current policy communication. As such, we don’t expect the dollar to enjoy material gains heading into Friday’s payrolls release, but a stronger-than-expected print would likely set the tone for a robust Q2 for both the dollar and risk appetite. Most of the movement by the FOMC, though, would need to happen via the real economy, in our view, as most FOMC members still expect inflation to stay below 2%. The Fed’s staff forecasts also pointed to better GDP figures and higher inflation, though trend growth was downgraded. Within a G10 context, the Fed still appears well ahead of the curve, though the ECB, which meets on Wednesday, seems more likely to act on inflationary impulse and we see the possibility of a rate hike next year if the sovereign debt situation continues to improve. There are residual second-round effect fears starting to edge into the Eurozone and we think this could be a key topic during Wednesday’s post-decision press conference, as well as scrutiny over short-term policy as national austerity budgets are delivered through April. Germany and the UK will release services PMI figures for March, while the ADP report and non-manufacturing ISM are due in the US. Data consolidation is expected to continue up ahead, but European figures are clearly lagging in momentum.
Click here to read the full report: UBS Morning Adviser Asia
UBS Investment Bank