Risk Off Continues
Markets were quiet overnight but risk continued to trade on a weak tone ahead of Chairman Bernanke’s comments later today. There is very little data due and it appears the market is simply inclined to work on adopting defensive positions especially if data up ahead will continue to disappoint to the downside. During the Asia session, the Japanese government nominated Ryutaro Kono as a new member of the BoJ Policy Board to replace one of two policymakers whose terms end in early April. Our economists note that Kono has hawkish tendencies and his endorsement by parliament – which is a prerequisite for his appointment to the board – is therefore not a foregone conclusion. Former RBA board member Lew criticized the current RBA board for mishandling the mining boom. He urged the bank to cut the policy rate by up to 75bp to ease the pressure on regional economies which do not benefit directly from the boom but still have to live with the consequences of a strong AUD. US economic data continues to outshine that of other major economies. Despite the weaker Chinese, French, German and New Zealand data on Thursday, US initial claims are still trending lower, with the 5k drop to 348k providing further evidence of improving labour market conditions. Though USDJPY has stalled in the past 48 hours, any further downside should be limited by the prospect of a sustainable US recovery that will allow the Fed to keep the QE option off the table – as the BoJ continues to ease. If there were any doubts about the latter, BoJ Governor Shirakawa again set the record straight overnight declaring that the BoJ would continue to pursue its easing steps with the aim of overcoming deflation. Yesterday, Chicago Fed President Evans (a non-voter and also a long term dove) said that low rates would be appropriate until inflation reaches 3% or until unemployment falls to 7%. These are the first numerical ‘triggers’ informally proposed by an FOMC official – instead calendar dates such as mid-2013, or end-2014 have been used in FOMC statements. That this is coming from a dovish member (Evans himself called for ‘more accommodation’ in the same setting) is even more surprising. With Bernanke speaking later today more clarity will be offered, but his comments yesterday noting the Fed has ‘more leeway’ when inflation is contained suggests there is no hint of a change in direction for now, but much of it would be contingent on the price outlook. Overnight EURUSD traded 1.3192-1.3293 and USDJPY 82.52-82.94.
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UBS Investment Bank