Investor Caution
European investors returning from their holidays were faced with a cautious tone to markets on Tuesday. The dollar gained against the euro, sterling and other risk currencies as the European bond markets re-opened with a clear risk-off tone. Spanish bonds came under further pressure, following last week’s sell-off and 10y yields now sit at around 5.9%. Wider risk appetite is quickly becoming a function of Spanish yields. In Europe, Swedish industrial production data was particularly weak but first-tier data was thin elsewhere. Overnight in Asia, the Bank of Japan made no change to any of its policy settings – in line with market consensus. USDJPY did drop 20 pips on the headlines however, suggesting a minority of investors were looking for more easing. We fully expect additional easing to come through eventually, but the next policy meeting on April 27 was always the more likely occasion for this. The extra time would allow the BoJ to take into account the results of the FOMC’s deliberations on April 24-25 and justify any policy easing with its updated Outlook Report. While there may be less scope for the BoJ to surprise markets now than in February, we believe that further BoJ easing in the face of a steady Fed would still boast the potential to put the yen on the defensive. The BoJ has a number of options at its disposal: (i) an extension of the APP from the end of 2012 to June 2013 or longer; (ii) an expansion of the APP by at least another JPY5 trn, concentrated in the JGB component; (iii) a removal of the selfimposed guideline that currently limits JGB purchases via the APP to those issues with two years left to maturity or less; (iv) an expansion of regular ‘rinban’ operations from the current JPY1.8 trn monthly pace; and (v) an upward revision in the inflation goal from 1% to 2%. Options (iv) and (v) would have the biggest negative effect on the yen, but are less likely than the first three at this stage. We maintain any further USDJPY pullback towards 80.00-80.50 ahead of the April 27 BoJ meeting would provide attractive re-entry points for dip buyers, targeting a rebound towards 85 on a three-month horizon against the backdrop of an unchanged Fed policy stance. In the absence of major data releases, investors will likely be closely watching the SNB’s defense of the EURCHF floor, with an announcement on the new policy member expected tomorrow.
Click here to read the full report: UBS Morning Adviser America