Stay Long Dollars
Markets were dormant during the European session due to holidays though general risk sentiment remained soft as indices which were open gradually absorbed the weak payrolls number on Friday. However, for investors looking for further policy alleviation on a global basis, the firmer China CPI print may have dampened such hopes, and the only reliable safe haven at this point remains with the dollar, where our core bullish dollar view is unchanged. We still expect the Fed to gradually back away from QE3 as other major central banks maintain an easier bias, and this will likely ensure the US dollar outperforms the other majors this year. Our US economics team stresses that the soft 120k US nonfarm payrolls print for March reflected ‘payback’ due to weather effects rather than fundamental weakening, with the earlier weather-related boost to payrolls now fully reversed. While the dip in the jobless rate to 8.2% in March from 8.3% in February came on the back of a 164k drop in the labour force, one should not lose sight of the pick-up in earnings growth amid improved job quality, as average hourly earnings rose 0.2% m/m (2.1% y/y). USDJPY will also be sensitive to the risk of further easing in Japan, with the BoJ kicking off its two-day meeting today. Granted, we see greater odds of action on April 27 than April 10, but any disappointment on a ‘no change’ verdict this week should be limited by the dovish signals emanating from Japanese officials. Come April 27, the BoJ should be better placed to ease, having (i) seen the results of the FOMC’s deliberations on April 24-25, (ii) adjusted its own macro forecasts and risk assessment, and (iii) possibly restored its full complement of 9 voting members and boosted by more doves. With FOMC commentary likely to remain active this week markets will have greater ability to digest where US policy stands, but external drivers will likely play an increasing role as questions remain whether the global economy will remain in a soft patch and central banks without the means to act. Overnight EURUSD traded 1.3035-1.3100 and USDJPY 81.21-81.55.
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UBS Investment Bank