The declines made by the USD on the back of the FOMC meeting and press conference yesterday evening are as good a barometer as any to reflect the market’s interpretation of Fed policy. Although the Fed admitted that it now expects to see higher inflation data, Bernanke sees this as transitory.

Consequently inflation is unlikely to stop the Fed from getting on with the business of digging the economy out of its “deep hole” and rates will remain “exceptionally low for an extended period”. The release of Q1 GDP data this afternoon is widely expected to see the pace of growth slow from Q4 levels. Slow growth, high unemployment and weak housing are all suggestive of the need for continued policy support.

Now that there is increased pressure on the US government to clean up its fiscal policy act, more emphasis may be placed on monetary policy. Increasing this is being interpreted by the market as meaning that a weak USD will be favoured as a stimulus tool. Bernanke’s attempt last night to re-state the Treasury’s strong USD policy was disregarded by the market as clearly lacking substance.

The USD index is currently off its overnight low. That said the market is clearly positioned for a fairly weak US Q1 report (median 2.0% q/q ann) suggesting room for some USD gains on the release. We would be looking to sell rallies on the anticipation that the USD index will drop to 70.00 in the coming weeks and potentially below.

Japan

Data releases have started to put some colour in the post-disaster performance of the Japanese economy, and the picture is not good. Unsurprisingly the market had been expecting poor data but the numbers have tended to be worse than forecast.

Yesterday there were appalling March retail sales data, today industrial production data for the month were down 15.3% m/m. The BoJ overnight cut its growth forecast for the year but pencilled in a rebound for Q4 as the re-building effort picked up steam.

Despite some rumours to the contrary, monetary policy was left unchanged last night as the committee favoured monitoring economic development. That said there is a huge amount of monetary stimulus already in the system and this is likely to soften the posture of the yen in the coming months.

While the weight of USD weakness continues to pressure USD/JPY, the JPY has this week been trending lower this week against currencies such as the EUR, AUD and CHF. On the assumption that risk appetite holds we look for EUR/JPY to push higher towards 126.00 on a 3 mth view.

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