USDJPY Searching For Fresh Support
US dollar bulls have been wounded by Friday’s weaker than expected US payrolls report, but our view is unchanged – we still expect a durable US recovery; we still expect the Fed to gradually back away from QE3 as other major central banks maintain an easier bias; and we still expect the US dollar to be the favoured currency in the G10 space this year. Our US economics team stresses 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. Also bear in mind that average monthly payroll gains accelerated to 212k in Q1 from 152k in 2011. 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) after an upward-revised 0.3% m/m gain in February (2.0% y/y). Our baseline scenario continues to feature a 200k trend in payroll growth which, alongside faster earnings growth, should support US consumption. 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 an extension of the programme to June 2013 and 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 reentry points for dip buyers. Ahead today, current account and trade surpluses are expected for February in Japan and should have little impact, while the consensus pegs an uptick in the March CPI to 3.4% y/y in China.
Click here to read the full report: UBS Morning Adviser Asia
UBS Investment Bank