USDJPY Consolidates
USDJPY consolidated overnight as next week’s FOMC and BoJ policy meetings draw ever nearer. Our US economists are not concerned by the higher than expected initial jobless claims announced yesterday. Instead they point to distortions associated with Easter holidays and the cross over to a new quarter, which has introduced volatility and an upside bias in the data series. Economic data elsewhere also disappointed though: existing home sales fell to a 4.48 mn annual rate; April Philly Fed manufacturing index down to 8.5. Meanwhile the Bank of Japan remains under intense political pressure to ease again with Economy Minister Furukawa – for the second day in a row – urging the BoJ to take steps to achieve its 1% price goal. He even explicitly pointed to the option of the bank buying JGBs with longer maturities – a possible policy outcome that we believe would be particularly yen negative. Indeed the key deciding 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. Implicit here is the gradual Fed-BoJ policy divergence that should serve to keep USDJPY risks tilted towards a move higher to 85 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. Ahead today, the focus will be on the IFO numbers in Germany and the G-20 meeting of finance ministers and central bank governors in the US. Canadian CPI numbers will be particularly noteworthy after the bank adopted an explicit tightening bias earlier this week.
Click here to read the full report: UBS Morning Adviser Europe
UBS Investment Bank