- Sentiment looks to be improving, but headwinds ahead
Commodity currencies emerged as the top FX performers against the USD, with the CAD gaining nearly 1% against the USD after the BoC’s hawkish statement. Market sentiment held up following the successful Spanish T-bill auctions and the better-than-expected ZEW survey: Italian and Spanish 10yr yields closed 11 and 19bps lower, respectively, and US equity markets rebounded – the S&P 500 closed more than 1.5% higher on the day. The IMF added to the cheer, upgrading its global growth forecasts for 2012 and 2013 by 0.2% each to 3.5 and 4.1% respectively, although cautioned that the situation remains very fragile. On this last we concur, seeing plenty of obstacles to a resumption of sustained risk-taking – not least of which will be tomorrow’s Spanish bond auctions. The ECB’s Gonzalez-Paramo is scheduled to speak today and will likely weigh in on the role of the ECB given increased market tensions. So far, we have heard mixed messages from ECB members, and our view is that spreads will have to widen more before we see the ECB step in via the SMP.
- JPY weakens despite reports of higher BoJ inflation estimate
Despite a Nikkei report that the BoJ might revise its CPI forecasts higher (presumably reducing the urgency for further easing), USDJPY has broken through 81.20 resistance this morning. While some of the buying was associated with technical breaks on yen crosses as risk rallied overnight, there was also a contribution from buyers of topside options covering next week’s FOMC and BoJ meets. Expectations of further easing from the BoJ are clearly building, but without a dovish surprise from the FOMC, we remain sceptical that the BoJ will undertake anything more than token measures. We see the link between monetary policy and fiscal reform suggesting that meaningful easing is only likely if there is clear progress on the fiscal reform bill.
- Hawkish BoC gives CAD a boost
The CAD was the biggest mover on the day, boosted by a hawkish BoC. While rates were left on hold, the bank highlighted that “modest withdrawal of the present considerable monetary policy stimulus may become appropriate and that the timing and degree will be weighed carefully against domestic and global economic developments”. The growth forecast was increased to 2.4% in 2012 from 2%, but the 2013 forecast was revised 0.4% lower to 2.4%, bringing forward the BoC’s expectations for the closing of the output gap to early 2013 from late 2013. As such, the market is now pricing in about 22bp of hikes until the end of the year compared to about 12bp before the meeting. Relative rate expectations should work in the CAD’s favour, particularly against other commodity currencies, and AUDCAD could see further downside, especially if next week’s Australian inflation solidifies the RBA’s 1 May cut. Further details on the Bank of Canada’s assessment of the economy will be released in the BoC Monetary Policy Report later today.
- Riksbank more likely than not to cut 25bps, BoE MPC minutes today
While the market is not looking for the Riskbank to cut rates, our economist expects a 25bp cut from the Riksbank, but it is a close call. A rate cut would hedge against downside risks to growth, and inflation expectations are falling, but the recent improvement in economic data has increased the chance that the bank will remain on hold. Thus, if our forecast does come to fruition, the SEK should be lower on the week. Also, the BoE MPC minutes will be important for the GBP. Recall that the March MPC minutes indicated that BoE Members David Miles and Adam Posen argued that larger monetary stimulus was warranted to reduce the risk that persistently weak growth would damage the future supply capacity of the economy. The surprisingly dovish minutes put the GBP in harm’s way. But, the April minutes may highlight a different tune from the MPC given the positive surprises on the PMI data for March. Thus, we reiterate our EURGBP forecast of 0.81 by end of Q2.
BNP Paribas