Bernanke’s Speech Eyed
It was a relatively quiet European session until all three major components of Germany’s IFO survey came in fractionally ahead of consensus expectations. The margin of surprise was marginal but the numbers came as a relief after last week’s extremely disappointing PMI report, and the euro got a brief boost. Heavy euro selling ensued without any obvious trigger. The last week of Japan’s fiscal year is now well underway, and anticipation is already building that the crossover to the new year will prompt a resumption of the five-week-old USDJPY rally. Softer-thanexpected US housing data on Friday forced USDJPY sharply lower, although we see this as only a temporary setback for the pair. What happens in the very short term will depend in large part on what Fed Chairman Bernanke has to say later today when he offers “A View from the Federal Reserve”. Generally firmer US economic data would appear to justify a more upbeat tone, although we would caution against expecting a decisive shift in Bernanke’s thinking. A total of eight other FOMC officials will also air their views this week. Whether mainstream Fed opinion has already begun to shift materially is still an open question, but we do expect Fed-BoJ policy divergence to become more pronounced in coming months. We remain alert for additional BoJ easing via the APP as early as next month – possibly coinciding with the release of the bank’s next Outlook Report on April 27. Later in the week the euro will likely be somewhat sensitive to headlines around the expansion of the Eurozone’s rescue infrastructure. A consensus appears to be forming in favour of temporarily raising the bailout firepower to EUR940 bn. This would be a marginally euro-positive development given it has been well telegraphed, although any negative response by the ratings agencies to rising sovereign contingent liabilities could quickly undo any benefit to the euro.
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UBS Investment Bank