Weaker USTs, Stronger USD
General US dollar strength amid the post-FOMC rise in UST yields remains the dominant theme, with USDJPY breaking above the 84 level and EURUSD threatening to slip through 1.30 during the Asian session. Though Japanese bonds have also come under pressure, USDJPY continues to feed off the widening of the 2yr UST-JGB yield spread, driven by expectations of Fed-BoJ policy divergence. Indeed, USDJPY risks still appear to be skewed towards the upside, with the Fed backing away from the QE option and the BoJ boasting plenty of room to expand, amend, and extend its Asset Purchase Programme (APP) as early as next month – perhaps in conjunction with the release of its Outlook Report on April 27. As flagged in our March 1 FX Comment (“Repatriation Games”), repatriation has not figured prominently in the run-up to the March 31 book closing in Japan. MoF data released earlier today confirmed that Japanese investors purchased a net Y 367 bn of foreign bonds last week; in fact, the Japanese have been net foreign bond buyers in 9 of the 10 weeks through March 9 to the cumulative tune of JPY 5.9 trn. Elsewhere, GBPUSD dipped below 1.5640 and remains heavy, though the downward revision in the UK’s ratings outlook to negative from stable by Fitch did not really add anything new to the equation. EURCHF continues to hold above 1.21 after its sudden jump yesterday, with the policy spotlight now on the SNB’s quarterly Monetary Policy Assessment. While the SNB may upgrade its growth prognosis alongside a downward revision to the short-term inflation outlook, our baseline scenario assumes the 1.20 floor will remain in place for the next 6 months or so at least. Apart from our long CADCHF recommendation via a call spread, one should also consider playing Swiss franc weakness against the US dollar as well. Our central view remains the same: the US dollar and US dollar-related currencies (CAD, MXN) should continue to be the better performers at a time when the Fed is on hold and other central banks are still busy trying to tame their currencies ( JPY, CHF). USDJPY traded between 83.65-84.18 in Asia, with EURUSD at 1.3004-1.3039.
Click here to read the full report: UBS Morning Adviser Europe
UBS Investment Bank