JPY - pullback or selling opportunity

News that the Japanese government has escalated the rating of the Fukushima nuclear threat to 7 (a major threat from 5) injected a sombre tone into the markets overnight. Asian stock indices were mostly lower across the board and the yen and the CHF clawed back some ground.

That said the CHF and the yen have already moved off their overnight highs suggesting reluctance by the market to fully relinquish recent trends. Many of the yen crosses have been showing signs of being oversold which would be consistent with a near-term pullback but the fundamentals continue to argue for further yen losses.

The massive liquidity add by the BoJ in the days after the March 11 disaster and the doubling of its QE plan puts its policy poles apart from other major central banks which are either hiking rates or deliberating over the timing of the first move. On the assumption that risk appetite holds, nominal yield spreads are likely to continue driving the yen lower suggesting that pullbacks in the yen may offer selling opportunities.

Today, focus will be on CAD/JPY given the BoC policy meeting. Steady rates are expected from the BoC though there is risk that the ground will be prepared for a rate hike later in the year - potentially in July. We are forecasting a move towards the CAD/JPY 97.00 area medium term.

EUR/USD - pausing for breath

EUR/USD pushed below the 1.4400 level this morning on the lowering of risk appetite overnight. Yesterday there was a lack of fresh drivers for EUR/USD and the same can be said for the Eurozone bond markets. Yields generally edged lower.

If the EUR is to retain its complacent attitude over the ongoing peripheral crisis, it is essential that the market retains the notion that Spain has implemented sufficient budgetary reform to avoid a bail-out from the EU/IMF. The moderately lower bias in Spanish bond yields suggests that this remains the case for now. In this environment interest rate differentials are set to remain the primary driving force for EUR/USD.

Over the past week or so the market has become even more aggressive in its ECB interest rate view; pricing in just over two further rate hikes by year end. In contrast comments from the Fed's Yellen overnight have served to cement the view that the Fed are in no rush to tighten. EUR/USD may be pausing for breath this morning but it is likely that pullbacks will be short-lived. We continue to see risk for a move to 1.50 by year end.

BoE - Inflation data

The market is expecting UK March CPI at 4.4% y/y in line with the February reading. In consideration of the BoE's warning that the inflation rate could rise to 5.0% this year and the strong PPI data released last Friday, there are upside risks associated with this release. Sterling may see some support on stronger than expected data.

However, we expect that most MPC member will hold back from voting to hike rates until the impact of the April austerity becomes clear (weak BRC data overnight highlights the vulnerable position of the economy). On our view that the BoE will not hike until Nov, GBP is vulnerable on rallies vs. the EUR.

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