A Stronger Yen
Yen bulls have reasserted themselves, with USDJPY losing its footing in the face of the surprise deterioration in the Philadelphia Fed manufacturing index to -5.8 in May from 8.5 in April. Details were broadly weaker, featuring declines in new orders and employment. This contrasted sharply with the 11-point jump in the NY Fed measure reported earlier this week, magnifying the focus on the Chicago PMI due May 31. Adding to the dollar negativity was the unexpected 0.1% m/m drop in the April index of leading economic indicators, the first decline in seven months. Jobless claims were unchanged at 370k – down 20k from a month ago to reverse most of the April spike – yet are not falling at a sufficiently fast pace to reduce the perceived risk of further Fed easing amid the considerable headwinds in the growth equation. The latest FOMC minutes highlighted the Fed’s concerns about the US ‘fiscal cliff’ and greater Eurozone risks, which returned to centre stage via the downgrading of Greece’s long-term foreign and local currency ratings to CCC from B- by Fitch. The agency warned that if the new elections on June 17 “fail to produce a government with a mandate to continue with the EU-IMF programme of fiscal austerity and structural reform, an exit of Greece from EMU would be probable. A Greek exit would likely result in widespread default on private sector as well as sovereign euro-denominated obligations, despite a moderate sovereign debt service burden following the restructuring of Greek government bonds in March”. Some solace could be gleaned from the latest poll results, the first to put the New Democracy (23%) ahead of the SYRIZA (21%) and PASOK (13%). The poll predicts the New Democracy could secure 123 seats, which combined with the PASOK’s 41, would produce a comfortable majority. This would be EUR-supportive to the extent it suggests greater scope for compromise on the bailout agreement, at least relative to a SYRIZA-led coalition. Nonetheless, it would be dangerous to put too much faith in one poll in this uncertain environment, where the yen remains a ‘safe haven’. Indeed, the yen crosses still look vulnerable – EURJPY, AUDJPY and GBPJPY, which has been undermined by Prime Minister Cameron’s assertion that the BoE has flexibility to do more to support the economy if needed. USDJPY remains heavy, though the downside should ultimately be limited by a renewed FX intervention threat. The focus is now on the G8.
Click here to read the full report: UBS Morning Adviser Asia
UBS Investment Bank