CAD,JPY

Friday 11:00 AM With the BOJ under criticism for worrying more about the state of its balance sheet than the economy, ZH goes to the tape. Turns out, the BOJ's assets foot to nearly 30% of the Japanese economy (compared to the Fed's 19%), suggesting years of modest easing have bloated the balance sheet, but done nothing to reverse deflation. Expect the next easing to be a big one.

Comment! [Global & FX

Canadian Inflation Just Right

Canadian inflationary pressures eased in March. Both headline and the Bank of Canada's core measure of inflation rose 1.9% from year-ago levels, following respective gains of 2.6% and 2.3% in the prior month.

The deceleration in headline inflation was largely broad based, however, easing food and energy prices gave the most relief to households in the month. Following a year of rapid growth, food price inflation eased to 2.3% in March - almost half the pace in February. While food prices did decline in the March, the deceleration in annual food price inflation more so reflected a base year effect of a one-month spike this time last year when bad weather in Mexico and the southern U.S. restricted supply of fresh vegetables. Gasoline (+6.6%) and electricity, water and fuel (+3.5%) price inflation moderated significantly in the month, but continued to grow at a firm pace.

Also notable was a sharp deceleration in the prices for clothing and footwear, which rose 0.5% in the month compared to 2.8% in the prior month. The price of durable goods fell by 0.9% from year-ago levels, led by an outsized 2.9% decline in prices for household furnishings and equipment.

Recreation and education and alcohol were the only two categories were accelerating inflationary pressures were visible.

Key Implications

For the first time in over a year, inflation grew at a slower pace than wages - albeit modestly so. Households are still likely feeling the pinch from elevated food price and high costs at the pumps, but at least upward momentum has eased. With commodity price growth starting to slow, Canadian consumer price inflation should continue to hover around the Bank of Canada's target of 2.0%.

Overall, inflation in March is consistent with the outlook presented in the Bank of Canada's monetary policy report earlier this week. With inflation neither too hot nor too cold, the Bank of Canada has breathing room to keep rates low over the next few months, but prepare for a possible rate hike come the fall.

the international price of oil has risen further and is now considerably higher than that received by Canadian producers. If sustained, these oil price developments could dampen the improvement in economic momentum.

Overall, economic momentum in Canada is slightly firmer than the Bank had expected in January. The external headwinds facing Canada have abated somewhat, with the U.S. recovery more resilient and financial conditions more supportive than previously anticipated. As a result, business and household confidence are improving faster than forecast in January. The Bank projects that private domestic demand will account for almost all of Canada’s economic growth over the projection horizon. Household spending is expected to remain high relative to GDP as households add to their debt burden, which remains the biggest domestic risk. Business investment is projected to remain robust, reflecting solid balance sheets, very favourable credit conditions, continuing strong terms of trade and heightened competitive pressures. The contribution of government spending to growth is expected to be quite modest over the projection horizon, in line with recent federal and provincial budgets. The recovery in net exports is likely to remain weak in light of modest external demand and ongoing competitiveness challenges, including the persistent strength of the Canadian dollar.

The Bank projects that the economy will grow by 2.4 per cent in both 2012 and 2013 before moderating to 2.2 per cent in 2014. The degree of economic slack has been somewhat smaller than the Bank had anticipated in January, and the economy is now expected to return to full capacity in the first half of 2013.

As a result of this reduced slack and higher gasoline prices, the profile for inflation is expected to be somewhat firmer than anticipated in January. After moderating this quarter, total CPI inflation is expected, along with core inflation, to be around 2 per cent over the balance of the projection horizon as the economy reaches its production potential, the growth of labour compensation remains moderate, and inflation expectations stay well-anchored.

Reflecting all of these factors, the Bank has decided to maintain the target for the overnight rate at 1 per cent. In light of the reduced slack in the economy and firmer underlying inflation, some modest withdrawal of the present considerable monetary policy stimulus may become appropriate, consistent with achieving the 2 per cent inflation target over the medium term. The timing and degree of any such withdrawal will be weighed carefully against domestic and global economic developments.

JPY

The U.S. dollar ended the week higher against the broadly weaker yen, as speculation that the Bank of Japan is set to announce new stimulus measures to bolster growth weighed. USD/JPY hit 81.60 on Friday, the pair’s highest since April 10; the pair subsequently consolidated at 81.49 by close of trade on Friday, gaining 0.80% over the week.The pair is likely to find support at 80.81, the low of April 13 and resistance at 82.54, the high of April 6.

On Thursday, BoJ Governor Masaaki Shirakawa said the central bank was “committed” to monetary easing in order to meet Japan’s 1% targeted rate of inflation.

Also Thursday, preliminary data showed that Japan posted a record JPY4.41 trillion trade deficit for the fiscal year ending on March 31, as imports of oil and gas to produce electricity increased, with most of the country’s nuclear reactors still offline.

In the U.S., data on Thursday showed that manufacturing activity in the Philadelphia-region expanded at a slower rate than expected in April and U.S. existing home sales declined unexpectedly last month.

The data came after a government report showing that the number of people who filed for unemployment assistance in the U.S. last week fell less-than-expected, while the previous week’s figure was revised higher.

The Department of Labor said the number of individuals filing for initial jobless benefits in the week ending April 14 fell by 2,000 to a seasonally adjusted 386,000, disappointing expectations for a decline of 18,000 to 370,000.

The previous week’s figure was revised up to 388,000 from 380,000

BOC:

Oil and gas

Regarding recent developments in the economy, members agreed that -- in line

with the interim assessment made in January 2012 -- Japan's economic activity had

remained more or less flat, although it had shown some signs of picking up. They shared

the view that exports and production continued to be more or less flat, mainly due to the

effects of the slowdown in overseas economies and the yen's appreciation. They

concurred that business fixed investment had been on a moderate increasing trend, aided by

the restoration of disaster-stricken facilities. As a favorable factor, a few members pointed

out that business sentiment had improved recently in a situation where stock prices were

rising and the yen was depreciating. One of these members added that the level of

business fixed investment relative to firms' cash flow was still constrained, and this member

was paying attention to whether investment would increase amid the improvement in

business sentiment. Members shared the view that private consumption had firmed up due

in part to the effects of measures to stimulate demand for automobiles. They agreed that

housing investment had generally been picking up and public investment had stopped

declining.

As for the outlook for the economy, members shared the view that -- in line with

the interim assessment made in January 2012 -- Japan's economy was likely to gradually

emerge from the current phase of flat growth and return to a moderate recovery path as the

pace of recovery in overseas economies picked up, led by emerging and

commodity-exporting economies, and as reconstruction-related demand after the earthquake

disaster gradually strengthened. Many members noted that production and public

investment had recently begun to show signs of a possible pick-up in the coming period.

One of these members said that one year had passed since the earthquake and economic

activity had almost returned to the pre-quake level. The member continued that this

marked an important phase for the economy, in which the momentum for self-sustained

recovery would be tested.

With regard to risks to the outlook for Japan's economy, members agreed that there

remained a high degree of uncertainty about the global economy, including the prospects for

the European debt problem, developments in international commodity prices, and the

likelihood of emerging and commodity-exporting economies simultaneously achieving

price stability and economic growth. As for the European debt problem, they shared the

view that, although it appeared less likely at present that tail risks akin to the Lehman shock

would materialize, it was nevertheless necessary to continue to pay attention to the

possibility of a sudden change in market participants' views on the European debt problem.

They then concurred that there was no major change in the landscape indicating that this

problem would continue to weigh on the global economy. Many members commented

that more time would be needed to overcome the more fundamental challenges,

strengthening the financial firewall, (2) enhancing fiscal governance, and (3) regaining

competitiveness of the economy. One of these members added that anxiety would sweep

through financial markets whenever some kind of problem materialized, and if the financial

firewall was inadequate and it took time to address this situation, it was highly likely that

instability in financial markets would reemerge. Many members pointed to various factors

behind the rise in crude oil prices, including the heightening of geopolitical risks associated

with the situation surrounding Iran, abating tensions regarding the European debt problem,

some improvement observed in the U.S. economy, and the implementation of monetary

easing around the world. On this basis, some members said that, if the rise in crude oil

prices were largely attributable to the heightening of geopolitical risks associated with the

situation surrounding Iran, not only could overseas economies decelerate, but also Japan's

economic activity could weaken as a result of declines in corporate profits and households'

purchasing power caused by a deterioration in the terms of trade, and thus it was necessary

to carefully monitor future developments. Some members noted that attention should

continue to be paid to uncertainty regarding electric power supply in Japan.

Members agreed that the year-on-year rate of change in the CPI (all items less

fresh food) was currently around 0 percent and likely to stay at this level for the time being.

One member expressed concern that the year-on-year rate of decline in the CPI (all items

less energy and food) remained relatively large. In response, a different member said that,

in the current 2010-base CPI, the weight of digital appliances -- for which the rate of

decline in prices was large -- had increased because the eco-point system had encouraged

the purchases of such appliances, and that it was necessary to take into account that this was

pushing down the year-on-year rate of change in the CPI. A few members -- referring to

the fact that there was an uptrend in the figure representing the difference between the

percentage share of items in the CPI for which prices had risen from the previous year and

those for which prices had declined, as well as in the trimmed mean CPI -- expressed the

view that prices were beginning to increase as a trend, albeit moderately. A few members

said that it was necessary to carefully monitor how the recent rise in crude oil prices would

be reflected in developments in the price indicators.

With regard to risks to the outlook for prices, members shared the recognition that

careful attention should be paid to future developments in international commodity prices

and in medium- to long-term inflation expectations.

Forexpros - Natural gas prices edged higher on Friday, as the previous day’s drop to the lowest level since September 2001 created bargain buying opportunities for investors, while other traders closed out bets on lower prices after futures moved into oversold territory.

On the New York Mercantile Exchange, natural gas futures for delivery in May settled at USD1.927 per million British thermal units by close of trade on Friday. On the week, prices tumbled 3%, the fifth consecutive weekly loss. Earlier in the day, prices fell to USD1.902 per million British thermal units, the lowest since September 26, 2001.  Prices have been hitting a string of fresh 10-year lows below the key USD2.00-level over the past two weeks, as market sentiment has been dominated by ongoing concerns over waning demand and elevated U.S. storage and production levels Despite Friday’s rare upward move, market participants expect the near-term downtrend in prices to continue, with some traders expecting prices to fall to USD1.850 in the short-term and eventually testing the all-time low of USD1.020 hit in 1992 in the long-term.Natural gas prices have plunged almost 26% since the beginning of March and are down nearly 36% since the start of 2012.Indications that demand for the fuel will remain weak in the near-term further weighed on market sentiment. In a three-month forecast for May through July, the National Oceanic and Atmospheric Administration said Thursday that above-normal temperatures are expected to stretch from the southwest across to much of the East Coast. The U.S. gas market is entering the so-called shoulder season. Gas use typically hits a seasonal low with spring's mild temperatures, before warmer weather increases demand for gas-fired electricity generation to power air conditioning. Further dampening sentiment on the fuel, researchers at Colorado State University said in a report last week that only four hurricanes are expected during this year’s storm season.

In total, the storm season that runs from June 1 to November 30 will produce 10 named systems, compared with 19 last year. Energy traders track tropical weather in the event it disrupts production in the Gulf of Mexico. Production in federal waters in the Gulf accounts for about 10% of natural-gas output, and prices typically spike when storms threaten production.Elsewhere in the energy complex, light sweet crude oil futures for June delivery traded at USD104.08 a barrel by close of trade on Friday, rising 1.19% on the week, while heating oil for May delivery dipped 0.56% over the week to settle at USD3.142 per gallon by close of trade Friday.

In the foreign exchange market, the yen depreciated

against the U.S. dollar as market participants focused on the turn in Japan's trade balance to

a deficit and the widening interest rate differential between Japan and the United States,

amid continued improvement in the U.S. economic indicators, as reasons to sell the yen.

The yen had recently been in the range of 82-83 yen to the dollar