FX: US Data and BoJ Governor

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This morning’s mixed U.S. economic reports left very little impression on the FX market. Economists were looking for a major upward revision to Q4 growth but instead, GDP was revised up to only 0.1% from -0.1%. While this means that the U.S. economy grew instead of contracted at the end of last year, economists were hoping for 0.5% growth. The shortfall was in consumption and imports, which fell more aggressively than initially anticipated. Perhaps if the so-called experts did not anticipate such a large revision to GDP, investors may have reacted more positively to the decline in jobless claims. Last week, jobless claims dropped from 360K to 344K and this low level of claims is consistent with a continued recovery in the labor market. Yet the dollar barely reacted to the data because they know it won’t change the Federal Reserve plans for monetary policy. Lower jobless claims may be encouraging but the Fed is primarily focused on job growth and therefore non-farm payrolls are far more important. The Chicago PMI report will be released later this morning followed by speeches from FOMC voters Raskin and Evans. Their comments could have a more significant impact on the dollar but bear in mind that both of these Fed Presidents are big doves.

Meanwhile today is also the end of a shortened but volatile month in the foreign exchange market. Some currency pairs like the EUR/USD and USD/JPY reversed their rise but others like the GBP/USD and AUD/USD extended their losses. Since there was no consistent movement in the dollar and U.S. stocks are pretty much unchanged from Feb 1 levels, we don’t expect much in the way of month end rebalancing flows.

The big story overnight was Prime Minister Abe’s formal nomination of Kuroda as Bank of Japan Governor and Iwata and Nakaso as Deputy Governors. Contrary to our expectations, there was no reaction in the Yen overnight. Japanese equity investors on the other hand were clearly satisfied with the decision as stocks rose more than 2.7% overnight. While we haven’t heard any official comments from Kuroda since the nomination, BoJ member Kiuchi confirms that the central bank will consider extra easing if necessary. Since he believes that the downside risks are large for the economic outlook and thinks the 2% price target will not be easily achieved, it is clear that he will throw his support behind more easing. Economy Minister Amari also wants the “BoJ to continue bold easing to reach their price target as soon as possible.” There will most likely be hearings in both the upper and lower houses for the BoJ nominees next week and at that point we could hear some official comments from Kuroda. Afterwards, votes on the BoJ Governor will most likely occur between March 14th and March 15th with a new Governor hopefully in place by the time Shirakawa steps down on March 19th.

Kathy Lien
Managing Director

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