Outlook and Recommendation

The first few months of 2012 have been marked by a risk rally, where equities and commodities have been strong and the US dollar (USD) has weakened materially. The foundation for this was laid by G4 central bank policy that has succeeded in decreasing much of the tail risk than hung over markets in 2011. Developments in Europe continue to be a key concern; however, markets have rewarded the euro (EUR) as several important hurdles have been passed. All is not solved, but shifts in central bank policy, economic fundamentals and investor sentiment have all soothed near-term fears. On the back of this, volatility across asset classes has collapsed, adding to the incentive to participate in the carry trade (selling lower yielding instruments to buy higher yielders). Flows into equities and emerging markets have been strong, supporting on-USD currencies. Outside of Europe, geopolitical risk and rising oil prices are complicating the economic outlook materially and pose a significant risk for 2012.

The US currency environment is dominated by the US economic outlook, flows and the broader movement of the US dollar. For the USD, the improving economic outlook and dollar positive flows stemming from the European crisis have been offset by historically loose US monetary policy that includes quantitative easing and rising oil prices. There are limits to how long the US economy can withstand a strong currency. Accordingly, we expect the USD to trend lower this year against most currencies except the EUR and JPY.

 Asian currencies are widely expected to rally against the USD, with one major  exception, the Japanese yen (JPY). The Bank of Japan's decision to increase its asset purchase program and institute an inflation target (2% in the medium term, but 1% for the time being) surprised markets. The combination of this, shifting trade dynamics and a low volatility environment has finally eased the strengthening bias of yen. We expect bouts of risk aversion to equate to bouts of yen strength, but that the overall trend remains one of weakness.

The Japanese yen USD/JPY has fallen 5.3% in February, given aggressive easing from the BoJ that followed a deterioration of trade data. Investors have reacted negatively to the shift in policy, and have reduced their net long position from US$9.3 billion to US$2.7 billion in recent weeks. Movement in USDJPY has broken the limited range seen sincemid-2011 and is consolidating above the key 80.00 level. Expect USDJPY ascent to be interrupted by periods of risk aversion and hold a Q4 2012 target of 82.00, moving to 78-79.00 range at the end of the first quarter and gradually moving to reach the 82.00 level.

 Central Bank

The Bank of Japan expanded its quantitative easing initiative ¥10 trillion to ¥65 trillion in February. In addition, the BoJ stated explicitly that it will target 1% inflation for the time being, a change from the previous 0%-to-2% target range, noting that it will conduct policy with the aim of achieving that goal. That suggests more easing is possible this year, despite the new purchases being spread over the rest of 2012. However, the yen's recent swoon should bring some relief to policy makers, which could preclude another move if the weaker trend continues. Expect no new policy measures in March.

Official Rate: 0%-to-0.10% • Quantitative Easing: Yes • Last Decision: Feb. 13-14, QE • Next Decision: March 12-13, Hold

 

Historic Chart

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March Major Economic Events

country

date

name

forecast

previous

Japan

20120306 01:30:00

Labor Cash Earnings (YoY)

-0.30%

-0.20%

Japan

20120307 05:00:00

Leading Economic Index

95.1

94

Japan

20120307 23:50:00

Gross Domestic Product (QoQ)

0.30%

1.40%

Japan

20120307 23:50:00

Gross Domestic Product Annualized

-0.60%

5.60%

Japan

20120308 05:00:00

Eco Watchers Survey: Current

46.3

44.1

Japan

20120308 05:00:00

Eco Watchers Survey: Outlook

 

47.1

Japan

20120308 06:00:00

Machine Tool Orders (YoY)

 

15.80%

Japan

20120311 23:50:00

Core Machinery Orders (MoM)

 

-7.10%

Japan

20120312 05:00:00

Consumer Confidence Index

 

40

Japan

20120314 04:30:00

Industrial Production (YoY)

 

-4.30%

Japan

20120321 23:50:00

Merchandise Trade Balance Total

 

?¥-1475B

Japan

20120328 23:50:00

Large Retailer's Sales

 

-1%

Japan

20120328 23:50:00

Retail Trade (YoY)

 

1.90%

Japan

20120329 23:30:00

National Consumer Price Index (YoY)

0.10%

Japan

20120329 23:30:00

National CPI Ex Food, Energy (YoY)

 

-0.90%

Japan

20120329 23:30:00

National CPI Ex-Fresh Food (YoY)

 

-0.10%

Japan

20120329 23:30:00

Overall Household Spending (YoY)

 

-2.30%

Japan

20120329 23:30:00

Unemployment Rate

 

4.60%

Japan

20120329 23:50:00

Industrial Production (YoY)

 

-1.20%

Japan

20120330 05:00:00

Housing Starts (YoY)

 

-1.10%

 
 
 
 
 

USA

20120309 13:30:00

Nonfarm Payrolls

207K

243K

USA

20120309 13:30:00

Unemployment Rate

8.30%

8.30%

USA

20120313 19:00:00

FOMC Minutes

 
 

USA

20120316 12:30:00

Consumer Price Index (YoY)

 

2.90%

USA

20120316 12:30:00

Consumer Price Index Ex Food & Energy (YoY)

2.10%

USA

20120329 13:30:00

Gross Domestic Product Annualized

 

1.80%

USA

20120329 13:30:00

Gross Domestic Purchases Price Index

2.60%

USD/JPY Pivot Points (Time Frame: 1 Day)

 

Name S3 S2 S1 Pivot R1 R2 R3

Classic
81.0413
81.2247
81.5133
81.6967
81.9853
82.1687
82.4573

Fibonacci
81.2247
81.4050
81.5164
81.6967
81.8770
81.9884
82.1687

Camarilla
81.6722
81.7155
81.7587
81.6967
81.8453
81.8885
81.9318

Woodie's
-
81.2510
81.5660
81.7230
82.0380
82.1950
-

DeMark's
-
-
82.0770
81.7425
81.6050
-
-