Stay Long Dollars
The dollar mounted a surprise recovery overnight, and quickly reclaimed all ground lost to the euro after Friday’s weak payrolls print. Flows were light however with New Zealand, Australia, and Hong Kong still on holiday. Even a stronger than expected China CPI report failed to generate much interest, and this 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, and this will likely ensure the US dollar outperforms the other majors 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. 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 reentry points for dip buyers. Fed Chairman Bernanke’s speech today is not expected to address monetary policy.
Click here to read the full report: UBS Morning Adviser Europe
UBS Investment Bank