US Data To Guide Risk Appetite
Risk assets had a soft start to the week in Asia, though some consolidation in the European session saw equity markets turn around. The Wall Street Journal reminded investors that Moody’s has the ratings of 114 European banks on review for a possible downgrade. We note that this review was announced in mid-February and that the article contained little new information. Elsewhere, China’s weekend decision to widen the USDCNY trading band from ±0.5% to ±1%, effective today, had very little effect on G10 currencies. The move was largely expected – although the timing was unknown – and in our opinion it should not be viewed as a game changer. Rather, the key message is that greater CNY volatility will be tolerated – one of many anticipated steps towards the PBoC’s long-term goal of full regime liberalisation. The move could benefit G10 commodity bloc currencies at the margin to the extent it signals confidence in China’s economy, but China’s broader macro performance should still be the greater driver. While Friday’s 8.1% y/y Q1 GDP print undercut market expectations, our Chinese economics team has flagged signs of stabilisation and improvement ahead, noting that policy easing is already underway as is reflected in the monthly new lending data. The wider trading band could also imply reduced intervention, reserve accumulation and hence currency diversification – a risk that could have the biggest negative effect on the euro. USDJPY should continue to find support from the dovish signals emanating from the monetary policy debate in Japan, where the constant political jawboning about the need for further easing has not prompted much overt resistance from the BoJ. All signs still point to further action on April 27, though recent press conjecture about a JPY5-10 trn boost to the APP may have effectively raised the bar for the BoJ to surprise. This should not detract from the prospect of gradual Fed-BoJ policy divergence that we maintain will keep risks tilted towards an upside USDJPY test of 85 on a three-month horizon. Today both US retail sales and the Empire State manufacturing survey are due, but neither are likely to significantly alter the Fed debate ahead of the pivotal FOMC meeting on April 24-25.
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UBS Investment Bank