The approach of fiscal year end in Japan is not a good time to be talking about the potential for a new trend to emerge in the yen, particularly given the numerous times that the yen has disappointed investors' expectations for a move lower.

That said EUR/JPY and AUD/JPY yesterday rose to their highest levels since last May, while USD/JPY pushed above the 82.00 resistance area, to trade this morning above 83.00. These moves suggest that the yen could be on the cusp of a break into weaker ground. The huge liquidity add by the BoJ in the aftermath of the crisis is likely to place downward pressure on the yen.

Also, expectations that growth will suffer from production disruptions caused by both the natural disaster and the nuclear threat are yen negative. These fundamentals are encapsulated in interest rate differentials which highlight the risk of a softer yen. EUR/JPY is at risk of being drawn higher by the 2y Bund/JPN spread.

Similarly USD/JPY and AUD/JPY are lagging the move in yield spreads. If US yields push higher in a post QE environment, this could be a significant upward incentive for USD/JPY. Forecasts for a softer yen depend, of course, on risk appetite holding its nerve. We are forecasting in a move to USD/JPY87 on a 12 mth view.

Refocusing on the dollar

The behaviour of the USD will clearly be instrumental in deciding the likely direction of USD/JPY. Yesterday the USD was boosted by hawkish comments from the Fed's Bullard. Recent remarks from Plosser and Lacker have also erred on the hawkish side.

Clearly payrolls data on Friday has the potential to be a big driver for the USD. Beyond that the behaviour of the fixed income market in the aftermath to QE2 could be critical for the USD. Logic would imply that US yields will rise once the Fed stops buying bonds.

This would be USD supportive. However, yields did not fall once QE2 was announced - most likely because the impact had been priced in. If US yields do rise this year post QE2 is may counter the support the EUR has garnered from expectations of ECB rate hikes and could slow the upward trajectory in EUR/USD over the spring and summer months.

More Fed speakers are scheduled this afternoon. Any more indications that QE is about to end are likely to offer the USD a little further support.

BoE - balancing act

In recent weeks the market has pared back expectations with respect to Bank of England interest rate hikes. A hike is not now fully priced until August. Yesterday the ONS reported that real UK household disposable income contracted by -0.5% q/q in Q4, the first fall since 1981.

These data highlight the fact that inflation is not keeping pace with price rises which suggests that inflation is not becoming embedded. They also are notable insofar as this contraction occurred before the January VAT hike and ahead of next month's austerity measures.

Today's the speech by the BoE's Fisher may provide some clarity as to the bias of the MPC's swing vote. We see risk that the BoE will delay a hike until Q4 and view GBP as still vulnerable on rallies vs. the EUR.

Disclaimer

This document is issued by Coöperatieve Centrale Raiffeisen-Boerenleenbank B.A. incorporated in the Netherlands, trading as Rabobank International (“RI”). RI is authorised by De Nederlandsche Bank and by the Financial Services Authority and regulated by the Financial Services Authority for the conduct of UK business. This document is directed exclusively to Eligible Counterparties and Professional Clients. It is not directed at Retail Clients. This document does NOT purport to be an impartial assessment of the value or prospects of its subject matter and it must not be relied upon by any recipient as an impartial assessment of the value or prospects of its subject matter. No reliance may be placed by a recipient on any representations or statements outside this document (oral or written) by any person which state or imply (or may be reasonably viewed as stating or implying) any such impartiality. The information and opinions contained in this document have been compiled or arrived at from sources believed to be reliable, but no representation or warranty, express or implied, is made as to their accuracy, completeness or correctness. This document is for information purposes only and is not, and does not constitute or intends to constitute investment advice or any investment service as referred to in the Act on Financial Supervision. You must make your own independent decisions regarding any securities or financial instruments mentioned herein. You are advised to seek independent professional advice as to the suitability of any products and their tax, accounting, legal or regulatory implications. All opinions expressed in this document are subject to change without notice. Neither RI, nor other legal entities in the group to which it belongs accept any liability whatsoever for any direct or consequential loss howsoever arising from any use of this document or its contents or otherwise arising in connection therewith. Insofar as permitted by the Rules of the Financial Services Authority, RI or other legal entities in the group to which it belongs, their directors, officers and/or employees may have had or have a long or short position and may have traded or acted as principal in the securities described within this document, (or related investments). Further it may have or have had a relationship with or may provide or have provided corporate finance or other services to companies whose securities (or related investments) are described in this document. The distribution of this document in other jurisdictions may be restricted by law and recipients of this document should inform themselves about, and observe any such restrictions. This document may not be reproduced, distributed or published, in whole or in part, for any purpose, except with the prior written consent of RI. By accepting this document you agree to be bound by the foregoing restrictions.

© Rabobank International, Croeselaan 18, 3521 CB Utrecht, The Netherlands

Source: Rabobank Group