Doves In Retreat
While equities declined in sympathy with disappointing US corporate earnings results, the FX focus remains very much on the less dovish signals emanating from various central banks. Indeed, the Bank of Canada backed up Tuesday’s warning that “some modest withdrawal of the present considerable monetary policy stimulus may become appropriate”
with an upgraded 2012 GDP forecast of 2.4% (versus 2.0% previously) in its Monetary Policy Report – underpinning our generally bullish Canadian dollar view and three-month USDCAD target of 0.98. The pound advanced against the euro and US dollar after the April BoE minutes revealed that the MPC voted 8-1 to keep QE unchanged instead of the 7-2 margin widely expected. Notably, the dovish Adam Posen voted with the majority to confirm recent hints that his view was slowly changing. And while the Riksbank left the repo rate unchanged at 1.5% and revised down its forecast for 2012 GDP, the overall tone of the minutes was perhaps not quite as dovish as many had expected. Elsewhere, the euro should be constrained by caution ahead of today’s Spanish bond auctions, particularly in the wake of data showing that non-performing loans as a proportion of total lending in Spain jumped to 8.16% in February – the highest level since 1994, and up from 7.91% in January and less than 1% in 2007. The yen has more room to weaken ahead of next week’s FOMC and BoJ meetings, as a steady posture from the former plus further easing from the latter should help push USDJPY towards our three-month target of 85. Ahead today will be comments from BoJ Governor Shirakawa and the latest MoF flows data, which will be closely monitored for any signs of increased FX risk appetite now that the new fiscal year is well underway. While the Japanese were net foreign bond sellers to the tune of JPY1.9trn in the first week of April, we suspect this reflected profit taking rather than the start of a sustained retreat. Also of interest today will be Japan’s March trade report, with the consensus pegging an unadjusted deficit figure of JPY223 bn.
Click here to read the full report: UBS Morning Adviser Asia
UBS Investment Bank