USDJPY Holding Firm
USDJPY extended its gains overnight and continues to look well supported even in the face of the rather soggy belowconsensus US data (initial jobless claims at 386k; March existing home sales down to a 4.48 mn annual rate; April Philly Fed manufacturing index down to 8.5) and declines in US equities, helped by dovish talk from BoJ Governor Shirakawa ahead of next week’s Policy Board meeting. In a speech delivered in Washington, Shirakawa reiterated the Bank’s pledge to continue “powerful monetary easing”, following yesterday’s stated resolve to remain “committed” to continue monetary easing in order to meet the 1% inflation goal. The key swing factor could very well be the growing political pressure on the BoJ for additional concessions, at a time when the Noda administration is battling to get its consumption tax hike legislation passed in the Diet. To be sure, recent press speculation about a JPY5-10 trn boost to the APP may have effectively raised the bar for the BoJ to surprise. While yen bears would warmly welcome an expansion of the BoJ’s regular outright JGB buying operations (rinban) or a doubling of the inflation goal from 1% to 2%, the most the BoJ may be willing to concede at this juncture would be a JPY10 trn increase in the APP – possibly complemented by a removal of the self-imposed guideline that currently limits associated JGB purchases to those issues with two years left to maturity or less, and/or an extension of the programme to June 2013. Implicit here is the gradual Fed-BoJ policy divergence that should serve to keep risks tilted towards a move higher towards 85 USDJPY on a three-month horizon amid a fading ‘home currency bias’ among Japanese investors. While the Fed will be in no rush to categorically rule out QE3, we maintain the case for further easing is less convincing in the US than Japan. EURJPY is sitting near its overnight highs, but the upside for EURUSD should continue to be limited by political event risk and the nervousness in the peripheral bond markets, where yields edged higher even though the Spanish auctions produced no major drama. Ahead today, the
focus will be on the IFO numbers in Germany, the CPI data in Canada, and the G-20 meetings in the US.
Click here to read the full report: UBS Morning Adviser Asia
UBS Investment Bank