Widening the CNY Band
The spotlight remains on China, where the PBoC announced a widening of the USDCNY trading band from ±0.5% to ±1%, effective today, the first widening since 2007. The move was largely expected and should not be viewed as a game changer. Rather, the key message is greater CNY volatility, one of many anticipated steps towards the PBoC’s long-term goal of full regime liberalisation. For now, this move could benefit commodity bloc currencies at the margin to the extent it signals confidence in China’s economy and any CNY appreciation against the majors prompts continued restocking of commodities. That said, China’s broader macro performance will still figure most prominently here. While Friday’s 8.1% y/y Q1 GDP print undercut market expectations, our Chinese economics team has flagged the signs of stabilisation and improvement ahead, noting that policy easing is already underway and reflected in the monthly new lending data. Look for a rebound in investment and GDP growth in Q2 – enough to keep our 8.5% growth call for 2012 intact and provide support for the commodity bloc. The wider trading band could also imply reduced intervention, reserve accumulation and hence currency diversification – a risk that could have the biggest negative effect on the euro. USDJPY should continue to find support from the dovish signals emanating from the monetary policy debate in Japan, where the constant political jawboning about the need for further easing has not elicited a lot of overt resistance from the BoJ. All signs still point to further action on April 27, though recent press speculation about a JPY5-10 trn boost to the APP may have effectively raised the bar for the BoJ to surprise. This should not detract from the prospect of gradual Fed-BoJ policy divergence that we maintain will keep risks tilted towards an upside USDJPY test of 85 on a three-month horizon. To be sure, Friday’s US data (March overall CPI up 0.3% m/m; core CPI up 0.2% m/m; April University of Michigan consumer sentiment index down to 75.7 from 76.2 in March) were far from decisive. Today’s releases (UBS estimates: March retail sales up 0.2% m/m; April Empire State manufacturing survey index down to 18.5; April housing market index up to 29) are unlikely to significantly alter the Fed debate either ahead of the pivotal FOMC meeting on April 24-25. However, the risk of further easing in the US is far less acute than in Japan. Pianalto and Bullard are today’s featured Fed speakers.
Click here to read the full report: UBS Morning Adviser Asia
UBS Investment Bank