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The US Federal Reserve pulled off a difficult balancing act last night, sounding both more upbeat on the economy, but also keeping open the option of further easing measures and maintaining the commitment to keep rates low until the end of 2014.

The expectation of growth was altered from “modest” to “moderate”, a seemingly small adjustment but a sign of the Fed’s cautious optimism that the recent run of good data is more than likely to be sustained.

It also noted the easing of strains in financial markets, whilst acknowledging the “notable” decline in the unemployment rate which remains “elevated” in its view.   The interesting thing is that, even with reduced chances of further QE, markets are increasingly shifting their focus onto economy, so Asian stock were able to follow through on the strong gains seen yesterday in European and US markets.

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But FX remains more circumspect. It’s interesting to note the declining correlation between AUD/JPY and stocks, from 0.90 to just above 0.70 now (rolling 3mth vs. S&P500).   It’s a sign that FX is disconnecting from the wider risk-on/risk-off ebb and flow in other markets.


China further eases lending standards. China announced today that it is to ease lending standards at three of the nation’s four leading banks. This follows on from a slowdown in lending, which was in turn driven by falling bank deposits. Lending is capped by loan to deposit ratios, so this a move to stop lending contracting as the economy slows. There were also further promises from Chinese Premier Wen Jiabao overnight on speeding up the pace of economic reform and allowing the yuan to float more freely, which supports the perception that Beijing is not going to allow the currency to appreciate to any great extent (if at all) from here.Yen weakness not down to BoJ. Once again, the yen weakened following the BoJ meeting yesterday, although this time the central bank made discernibly little change to policy. As with yen weakness after last month’s BoJ meeting, at first sight the currency reaction looks a little overdone given the limited impact the announced measures are likely to have near-term (or even longer-term). Last month, as we pointed out, the spate of yen weakening appeared also to be down to the widening of interest rate differentials at the short end (2Y) in favour of the dollar, at least in driving the initial bout of yen weakening. This has also been a factor in the latest move, the spread between Japanese and US 2Y rates (swap) widening out in favour of the dollar as the US rate has moved above the 0.30% level. Also in the background has been the rise in the oil price, significant because of Japan’s status as the world’s third largest oil importer. Of course, the Japanese authorities would very much desire to see a weaker yen at this point in time but for the most part they are pretty much sidelined as the yen is subject to wider market forces. As such, it would be a mistake to pass all the credit for prompting this latest bout of yen weakness to the BoJ.

Green shoots in the UK. The days are getting noticeably longer, the daffodils are in bloom and the birds are chirping. Synchronistically, the arrival of spring in the UK has coincided with the appearance of some green shoots of recovery in the UK. For instance, house prices appear to have stabilised in recent months after dipping in the final quarter of last year; the RICS house price balance registered a 19mth high in February, helped to some degree by a dash by first-home buyers to take advantage of a stamp duty-exemption which ceases on March 24th. Interest rates are still very low, assisting those with large mortgages; foreign demand for central London property is still strong and supply in the capital is very limited with few sellers. Unsurprisingly, London remains a standout, with RICS suggesting that it was “particularly buoyant”. In contrast, residential property markets in both the West Midlands and Northern Ireland remain deeply depressed. A mild winter provided a boost for the construction sector, consumers splurged to take advantage of massive discounts on the High street and UK manufacturing is in a generally positive frame of mind with decent forward orders. Manpower, the recruiting giant, reports that jobs demand has improved slightly in recent months, especially from London-based employers. At the very least these green shoots offer some encouragement that the economy is unlikely to fall into recession in the near term.