Dovish Germans Hawkish Japanese

The irony of all ironies in FX is that Bundesbank President Jens Weidmann hinted at lower interest rates if information warrants it, while Japanese officials are verbally supporting the yen (closely monitoring FX movements) ahead of the G20 in order to deflect accusations of currency manipulation. Both of these indications are unusual and unlikely to hold.

EURUSD lost 1.4 cent on the Weidmann comments, which highlight that the euro’s biggest risk factor remains that of a rate cut and not political uncertainty in Italy, austerity in Portugal or the threat of taxing deposits in the eurozone. Having said, we do not expect the ECB to resort to slashing its refinancing rate as it is not only ineffective (compared to LTROs), but would produce negative interest rates. EURUSD remains vulnerable to retesting 1.2900s before accumulating stabilisation around 1.3200 by late Q2.

The Bank of Canada issued a timid downgrade of its 2013 GDP forecast, to 1.5% from 2.0% in January and 2.3% in October. But it raised its 2014 growth outlook to 2.8% from 2.7% in January. The take-away from the policy statement is that the BoC delayed its tightening plans, rather than abandoning them.

The BoC mentioned “mid 2015” as a target date for reaching “full capacity”, as well as achieving its 2.0% inflation target. Thus, any expectations of any tightening have been shifted to 2015 from 2014.

There was no mention about “jobs” “employment” or “labour markets” in the policy statement, despite the 54.5K plunge in March employment (biggest decline in over 4 years) and the rise in the unemployment rate to 7.2% from 7.0%. Deteriorating employment in manufacturing has also been a factor. We expect these negatives to extend among the deepening effect of sequestration in the US, slowdown in China and prolonged weakness in Europe.

The BoC also noted “Commodity prices received by Canadian producers remain elevated by historical standards”. Yet the broad decline in commodities may begin altering the dynamics. The CRB/Jefferies Index is down 12% from its September high, trading at 10-month lows.

The Canadian dollar is the worst performing currency out of the top 11 traded currencies (after the yen) so far this month. The chart below shows it is the worst performing commodity currency so far this year, behind the Nokkie.

USDCAD jumps to 5-week highs at 1.0295 and is expected to taper off around 1.0320, followed by temporary pullback near 1.0250s, before an accelerated recovery towards 1.0450s. CADJPY may also fall victim to Tokyo’s pre-G20 verbal support of the yen, which could lead to 92.50s. USDJPY remains bid near 95.50.

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