Respite For Now
After the heavy sell-off in risk assets on Tuesday, markets stabilized overnight in Europe. Equity markets turned around, buoyed by the prospects of strong US earnings results and the FX markets responded accordingly. Despite a relatively expensive Italian bill auction, periphery fixed income markets rallied, reversing some of the losses sustained yesterday. FX is a lagging market in the current environment, and we continue to expect swings in risk appetite depending on the developments of other markets. Any evidence of a strengthening US recovery through earnings results will go some way to offsetting the negativity surrounding Friday’s weak payrolls report. The inability of Spain’s fiscal austerity measures to alleviate bond market strains is worrisome, although sentiment was not helped by yesterday’s comments from Bank of Spain Governor Ordonez that Spanish lenders may require additional capital if the economy weakens more than expected. As far as trades are concerned the pullback in USDJPY provides an attractive re-entry point for dip buyers looking for a move up to 85 over the next few months. The substantial risk of another round of BoJ easing on April 27 suggests further upside may be only a matter of time. While a rinban expansion or hike in the inflation goal would be asking too much at this stage, a JPY5 trn boost to the APP would certainly be feasible and sufficient to weaken the yen – particularly if complemented by a removal of the self-imposed maturity guideline on JGB purchases via the APP. For the next 2 weeks however, USDJPY will take its guidance from the US side. Amongst the slew of Fed officials due to speak today, Fed Vice-Chair Yellen has the greatest potential to be market-moving especially given she has been notably absent from the lecture circuit since November. A well-known dove, it would be significant if she too backs away from the use of QE3 as a possible future policy option. The speech entitled “The economic outlook and monetary policy” should provide ample scope to address this specific point.
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UBS Investment Bank