Risk sentiment improved of late, regardless of the IMF warning that a prolonged period of slow growth has left the global economy more exposed to negative risks. More importantly, sentiment with respect to the oil sector improved after Saudi Arabia and Russia were said to have reached a consensus with respect to an oil freeze and as such a freeze will not depend on an agreement with Iran, as previously required.
The latest development may be good for additional position squaring related upside risks, especially as the latest trade data out of China proves supportive to global growth expectations. Further stabilizing commodity prices may come to the benefit of US inflation expectations, especially in an environment of more constructive domestic conditions. As such it cannot be excluded that the Fed will start shift its focus back to constructive domestic conditions as when it comes to the setting of monetary policy.
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In an environment of more stable risk sentiment and more supported central bank rate expectations the greenback may be a buy on dips, even against the JPY.
When it comes to the JPY it must be noted that the BoJ will decide on monetary policy by the end of April. BoJ’s Harada stressed overnight that the strong JPY weakens upward pressure on prices and that the timing of meeting the price target will be delayed. He added that the central bank will debate additional easing steps if needed to respond to economic risks and that even lower rates may be considered.
We share the view that the BoJ will have to turn more aggressive later this month. Rising easing expectations coupled with somewhat more stable risk sentiment should keep the JPY capped for now.