The US dollar recovered after economic data came in better than expected. The EUR edged lower after the ECB signalled that they are open to more conventional and unconventional monetary measures to achieve their inflation target. The NZD succumbed to profit taking while improving risk sentiment and expectations of further BoJ stimulus continue to weigh on the JPY. Emerging market currencies were mixed. The TRY outperformed as economic growth surprised on the upside while the CLP was lower after multiple earthquake shocks.
Improving outlook supports the USD
Early last week, the US dollar (USD) came under pressure after Fed Yellen stated that the economy needs extraordinary support for some time as there is considerable slack in the economy and labour market. However the USD recovered after economic data generally came in better than expected. This week the FOMC minutes is likely to reinforce our view that the QE tapering will end by October this year.
The CAD extended its second week of gains after encouraging signs that growth is likely to have bottomed. On the other hand, the NZD succumbed to profit taking after recent weeks of gains. Weaker than expected domestic data weighed on the AUD. In addition, the RBA warned that the recent rise in the AUD will slow the rebalancing in the economy. The RBA also showed its discomfort by stating that the exchange rate remains high by historical standards. The SEK also closed lower last week after the service sector in March expanded at the slowest pace in six months. Dovish comments from the ECB weighed on the EUR last week. The ECB signalled that they are not yet finished with other conventional monetary measures including cuts to main and deposit rate, LTRO and ending the SMP sterilization. Furthermore, ECB Draghi said that the ECB was more open to QE.
JPY extends slide on improving risk sentiment and BoJ stimulus expectations
Improving risk sentiment and continued expectations that the BoJ is likely to increase monetary stimulus in the coming months continue to weigh on the JPY. Indeed a recent BoJ survey showed that companies expect inflation excluding the effects of sales tax to rise to only 1.5% and 1.7% after 1 and 3 years’ time. This is likely to pressure the BoJ to take further steps to achieve their 2% inflation target by the end of FY 14 or early FY 15. Economic growth in Japan is expected to slow after the sales tax hike came into effect this month. On the other hand, we expect global growth to pick up. As a result the net repatriation flows seen in 2013 is likely to reverse, exerting more downward pressure in the JPY later this year. The BoJ is expected to leave monetary policy unchanged later this week.
Mixed performance in EM currencies
The TRY gained for the second consecutive week as growth in the last quarter rose at the fastest pace in two years. The RUB also recovered as 2013 Q4 GDP came in better than expected. However gains were limited after PMI numbers in March contracted to the lowest level since August 2010. In Asia, both the KRW and TWD were supported due to encouraging signs that growth in China has stabilised and will recover after the Chinese government announced a mini stimulus package. The KRW also benefited as both the trade and current account surplus widened more than expected. Sentiment in both the offshore CNH and onshore CNY improved after China’s manufacturing PMI in March came in better than expectations. However gains were limited after the PBoC engineered a weaker CNY fix after non-manufacturing PMI expanded at a slower pace. Though the technical outlook remains weak for the spot market, the options demand to hedge further weakness in the currency continues to decline for the second consecutive week. We remain cautiously optimistic that the CNH will recover to 6.0 against the USD later this year. Multiple earthquake shocks in Chile pressured the CLP by more than 1% while the BRL was sold off after the central bank removed its monetary tightening bias. The ZAR also closed lower due to profit taking.
This week, we expect the Monetary Authority of Singapore to maintain their modest appreciation policy in the SGD as core inflation is expected to rise from 1.6% in February to average 2-3% in 2014. Bank Indonesia is also widely expected to leave monetary policy unchanged this week as the central bank views that inflation could remain elevated this year.