The yen rallied in Asian trade after S&P upgraded Japan 's sovereign credit rating to AA from AA-, making the nation's first upgrade since 1975. The reduction of nonperforming loans and normalization of monetary policy as well as the gradual retreat in deflationary pressures have all been cited by S&P as the factors leading to their decision. The other factor behind the yen's rally is a story in today's Financial Times about reporting that Japan is considering the creation of a special state investment fund to manage part of its $1 trillion billion in currency reserves and boost the returns to meet its rising pension obligations.
But the yen is pulling lower after Japan 's vice Finance Minister Fuji denied the FT report, adding there were no intentions to alter the nation's FX reserves composition. We should add that Mr. Fuji's remarks were intended to avoid any sharp gains in the already rising yen against the already depreciating dollar, an event that would jeopardize the dollar holdings of Japan 's reserves.
Aussie drops on PPI, tonight's CPI will be crucial
Tonight's Q1 CPI report from Australia (due 9:30 pm EST) will be crucial in determining the odds of an interest rate hike next week. Q1 CPI is expected up 0.6% after -0.1% in Q4, while the y/y rate is seen at 3.0% from 3.3%. The more important reading will be the y/y core CPI, expected at 2.8% from 2.95%, which, would be a further a decline within the Reserve Bank of Australia 's preferred target band of 2-3%.
Euro drops on comments, but US data seen supportive
Concerns of further weakness in US growth will resurface later this week, when US Q1 GDP is expected to come in at 1.8%, matching the low of Q4 2005. A reading below 1.8% would be the lowest since Q1 2003.