On The Defensive
Markets remain in ‘risk off’ mode, emboldening the yen bulls against the backdrop of the overnight drop in the major equity indices, lower commodity prices, sub-2% 10yr UST yields and wider peripheral spreads in Europe. The inability of Spain’s fiscal austerity measures to alleviate the pressure in the bond market is worrisome, as Economy Minister de Guindos declined to rule out a rescue for the country and Bank of Spain Governor Ordonez said Spanish lenders may require additional capital if the economy weakens more than expected. Though yesterday’s unanimous decision by the BoJ to stand pat was largely anticipated, the downside has remained the path of least resistance for USDJPY, amid the post-US payrolls hangover and renewed Eurozone concerns, which have depressed the crosses. That said, we maintain that any further USDJPY pullback towards 80.00-80.50 would provide attractive re-entry points for dip buyers, given the clear risk of BoJ easing at the next Board meeting on April 27 – reinforced by the overt political pressure for further action, which will only intensify to the extent USDJPY and the Nikkei head lower in the interim. From a timing perspective, the case for easing on April 27 rather than April 10 was far more compelling in the first place, as it will allow the BoJ to take into account the results of the FOMC’s deliberations on April 24-25, not to mention the proposals likely to be aired by the government’s anti-deflation panel – which will be led by Economic and Fiscal Policy Minister Furukawa, with Governor Shirakawa serving as an “observer”. The fact that politicians have been so quick to trample on the BoJ’s independence highlights the strong desire for policy action to tame yen strength at a time when bold fiscal initiatives cannot be expected. While a rinban expansion or hike in the inflation goal would be asking too much at this stage, a JPY5 trn boost to the APP would certainly be feasible and sufficient to put the yen on the back foot – particularly if complemented by an extension of the APP to June 2013 or longer and/or a removal of the self-imposed maturity guideline on JGB purchases via the APP. USDJPY will now be looking for guidance from the US side, most notably the Fed’s Beige Book (expect a similar tone to the previous assessment) and the slew of Fed officials due to speak – Lockhart, George, Rosengren, Bullard and Yellen.
Click here to read the full report: UBS Morning Adviser Asia
UBS Investment Bank