Currency traders are selling dollars this morning for 2 main reasons. The first is risk appetite - the increase in liquidity from the Bank of Japan and the potential rate cut from the Reserve Bank of Australia next week reinvigorated the risk rally. Investors have been able to ignore everything including a lower credit rating for Spain as long as central banks continue to provide a massive liquidity backstop. Even though the Fed did not increase asset purchases this week, keeping this hope alive was enough to send the dollar lower and equities higher.
The second reason for the dollar's weakness is softer U.S. economic data. The possibility of another round of Quantitative Easing was reinforced by this morning's GDP number. In the first quarter, annualized U.S. GDP growth slowed to 2.2 percent from 3.0 percent. Personal consumption jumped 2.9 percent but a decline in government spending and sluggish growth in fixed investments dragged the overall index lower. Unseasonably warm weather in February provided a rare boost to consumer spending that many people including Fed Presidents find unsustainable particularly given the recent deterioration in job growth. Nonetheless with spending and inflation up in the first quarter (Core PCE rose from 1.3% to 2.1%), the GDP report won't be changing anyone's QE3 bets. The final April University of Michigan Consumer Confidence report will be released at 9:55AM ET / 13:55 GMT - given that no major revisions are expected, the impact on the dollar should be nominal.
Meanwhile the Bank of Japan's monetary policy decision last night was a bit confusing. There are some reports that the BoJ increased asset purchases by Y5 trillion and other reports that they increased JGB purchases by Y10 trillion. To set the record straight, the BoJ increased its Asset Purchase Program ( APP ) by Y10 trillion to Y29 trillion but they pared back a separate program by Y5 trillion, so net-net the total program was expanded by Y5 trillion to Y70 trillion. Aside from the increase in amount of assets purchased, the BoJ also extended the maturity of bonds purchased from 2 to 3 years. Investors were obviously impressed as they bid the Yen up following the BoJ decision. According to the central bank's press conference after the release of their outlook report, there is scope of additional stimulus if inflation undershoots their 1 percent target. If USD/JPY breaks below 80, the odds of more stimulus rises significantly because not only could a stronger Yen push the trade deficit to record highs but also makes it even more difficult for the BoJ to achieve their inflation target. In other words, the BoJ is far from done and for this reason, the decline in USD/JPY could be limited. However don't expect to hear anything new from the Japanese in the coming week as the country winds down for Golden Week holidays.
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