ECONOMETER

Japan and the JPY continue to garner most market attention as the currency’s weakness continues to extend, leading to pressure in closely correlated currencies and markets especially in Asia, notably in Korea. European tensions have not eased to any significant degree with some praise for Portugal’s attempts to overcome a constitutional court ruling on planned budget cuts but little progress elsewhere including in Italy where there is no sign of any agreement on the formation of a new government.

Equity markets in the US edged higher but direction will come from the host of Q1 earnings announcements over coming weeks as the US earnings seasons kicks in. Commodity prices continue to remain weak, with the CRB commodities index trading its lowest level in several months while the Baltic Dry index also continues to move lower, pointing to a slightly more negative outlook on the growth front.

USD/JPY has continued its ascent following the inspiration provided by the BoJ last week from its surprisingly aggressive new policy measures. The sharp move higher in USD/JPY over recent days is all the more impressive given that the US yield advantage over Japan has actually narrowed over the period while risk aversion has crept higher.

The market is clearly giving BoJ governor Kuroda the benefit of the doubt and it appears that there are plenty of JPY sellers on any rally in the currency. While I am a bit cautious in the near term about the ability of USD/JPY to push much higher it is clear that the trend is well in place for further JPY weakness and it is worth noting that speculative JPY positioning is not yet at extreme levels.

My model on USD/JPY based on yield differential and risk forecasts suggests that USD/JPY will be able to sustain a break above 100 over coming weeks and on this basis I have revised my forecasts. I now expect USD/JPY to reach 104 by end 2013 and 110 by end 2014 from 97 and 101 previously.

I look for further gains in GBP. Against the EUR, GBP has underperformed recently but we do not see GBP weakness persisting especially given the weight of negative factors building up for the EUR. A likely bounce in February UK industrial production today will build on the better than expected reading for UK March house prices as revealed in the RICS data this morning (-1% compared to consensus of -5%) while the BRC retail sales survey also came in better than expected with like-for-like sales rising by 1.9% in March.

The firmer data readings will provide some support for GBP over the short term and will likely help to fuel short covering in a speculative market that is still heavily short GBP according to the CFTC IMM data. I look for GBP/USD to breach technical resistance around 1.5393 over coming sessions, with any pull back likely to be restricted to support around 1.5159.