Forex Investment and Currency Trading

Eurozone March CPI inflation was revised up to 3.6% yoy from a preliminary estimate of 3.5% and February’s 3.3%. Core inflation also edged up to 2.0% yoy from 1.8% in the previous month. Inflation was probably distorted a little to the upside by the early Easter holiday, which pushed the travel and shopping season into March; however, it should account for only around 0.1ppt. The 16-year high inflation reading in March will not bring back an immediate rate hike debate among the ECB, but it will surely prevent any rate cut discussion until inflation is safely back below 3%. ECB members will likely maintain a hawkish stance on inflation and future policy, supporting a EUR/USD break above 1.60 in the weeks ahead.

UK The claimant count unemployment dropped a smaller-than-expected 1.2k in March, with the unemployment rate remaining at a 30-year low of 2.5%. In the 3 months to February, employment rose 152k to 29.5mn, the highest since records began in 1971. While the labor market remains tight and is one bright spot in the UK outlook, with GDP growth likely substantially below trend in 2008-09, the labor market looks set to soften in coming months. We expect the ILO unemployment rate to reach the 6.0% level in 1H 2009, but this would still be well below the 10% levels reached in the early 1990s recession. On the earnings side, there was no sign of wage pressure, with the 3-month headline earnings growth (including bonus) falling to 3.7% yoy from an upwardly revised 3.9% in January. Ex bonus earnings ticked up to a still subdued 3.8% in February from 3.7%. In
other news, the BoE is reportedly close to finalizing terms to address the money market conditions, by accepting a wider pool of mortgage-backed securities against government securities, similarly to the Fed’s TLSF.

Japan The JGB 2s-10s curve bear flattened on a further receding of BoJ rate cut expectations on firmer equities. One major life insurer reportedly plans to boost unhedged foreign bond holdings during FY2008 (which started on April 1), while other life companies are generally not willing to boost unhedged foreign bond holdings. Several major life insurers plan to boost domestic bond holdings including super long JGBs. Asked about JPY exchange rates, BoJ Governor Shirakawa stated that the JPY is strong versus the USD, but not strong versus the EUR. His comments suggest that the BoJ is not concerned about effects of current JPY exchange rates on the economy. LDP Policy Research Council Deputy Chairman Sonoda stated that the consumption tax rate should be hiked by at least 1 percentage point from the current 5% in FY2009 (that is, April 1, 2009) to finance the increase of more than Y2tn in the government’s contribution to public pensions. However, in view of the likely economic slump, the expected timing of the consumption tax hike has already been postponed from April 2009 to April 2010. The Nikkei Quick’s diffusion index of analysts’ corporate profit expectations has dropped to -42 as of April 14, the lowest since October 2004. Market expects the deteriorating profit expectations to lead to lower capital spending and wage income growth. The likelihood of volatile equity prices on profit concerns will also add further to downward forces on economic activity via negative sentiment, wealth effects and tighter financial conditions. PM Fukuda has given up his plan to visit Europe after his return from a trip to Russia on April 29, the date for the key Lower House Yamaguchi by-election, which could lead to a defeat of the ruling coalition and force him to give up reviving the gasoline tax surcharge, and may even lead to a Cabinet resignation in the worst case.