USDJPY Marches Higher
The yen weakened overnight despite a press report indicating that the Bank of Japan’s inflation forecasts may be raised. It seems some FX investors are already positioning themselves for USDJPY upside ahead of next week’s FOMC and BoJ meetings – both of which are likely to push the pair higher towards our 3m forecast of 85. Elsewhere our bullish call on the Canadian dollar was supported by the more hawkish posture of the Bank of Canada, which warned that “in light of the reduced slack in the economy and firmer underlying inflation, some modest withdrawal of the present considerable monetary policy stimulus may become appropriate”. This anticipated shift was the key driver of our USDCAD forecast revision last week (to 0.98 from 1.03 on a three-month horizon). Note that we are also long a CADCHF call spread. The statement tees up a possible upgrade to the GDP forecast in the Bank’s quarterly Monetary Policy Report due later today. The more hawkish stance of the Bank of Canada certainly stands out at a time when most other major central banks are retaining an easing bias. Later today, the BoE minutes will be closely monitored for any fresh insights. While a unanimous decision is expected on rates, we expect a 7-2 vote split on QE, portending a close decision at the May MPC meeting. For the record, our UK economics team believes the MPC will not expand the QE programme next month in the face of inflation figures that continue to exceed the BoE’s forecast, but the upcoming Q1 GDP data and Eurozone developments could still have a significant bearing on the debate. The Riksbank meets today and we expect the repo rate to be left unchanged, though the policy statement will likely be fairly dovish, with little inflationary pressure inside Sweden.
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