Positive Data Surprises
Both the pound and the euro gained ground in the European session after positive data surprises from both regions. The euro rallied after the German IFO business climate index rose to the highest IFO since August 2011. Sterling also pushed higher after UK retail sales rose +1.8% m/m in March vs +0.5% consensus. The gains were driven by seasonal factors (the good weather in March) and the data series is volatile but as our UK economist notes, the data will support those on the MPC that believe that the economy is in gentle recovery mode. USDJPY continued its move higher as next week’s FOMC and BoJ policy meetings draw ever nearer. Our US economists are not concerned by the higher than expected initial jobless claims announced yesterday. Instead they point to distortions associated with Easter holidays and the cross over to a new quarter, which has introduced volatility and an upside bias in the data series. Meanwhile the Bank of Japan remains under intense political pressure to ease again with Economy Minister Furukawa – for the second day in a row – urging the BoJ to take steps to achieve its 1% price goal. He even explicitly pointed to the option of the bank buying JGBs with longer maturities – a possible policy outcome that we believe would be particularly yen negative. Indeed the key deciding factor could very well be the growing political pressure on the BoJ for additional concessions, at a time when the Noda administration is battling to get its consumption tax hike legislation passed in the Diet. Implicit here is the gradual Fed-BoJ policy divergence that should serve to keep USDJPY risks tilted towards a move higher to 85 on a threemonth horizon amid a fading ‘home currency bias’ among Japanese investors. While the Fed will be in no rush to categorically rule out QE3, we maintain the case for further easing is less convincing in the US than Japan. Ahead today, the focus will likely be on the G-20 meeting of finance ministers and central bank governors in the US. Canadian CPI numbers should be particularly noteworthy after the bank adopted an explicit tightening bias earlier this week.
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UBS Investment Bank