The dollar sunk to a two-month low against the yen Monday, still struggling under the pressure of disappointing Q1 US growth. The data, out Friday, revealed much-cooled growth and shunted the issue of QE back into the forefront of traders’ minds.

"A flavour of QE is back in the air, driving the USD lower and risky assets higher," said Sebastien Galy, strategist at Societe Generale. The dollar fell to 80.10 yen at one point on trading platform EBS, its lowest level since late February according to forex news records, and was last changing hands at 80.18 yen, down 0.1 percent from late US trade on Friday. Economists are now suggesting that the expansion of the Bank of Japan’s asset-purchasing fund has not managed to outweigh effect of data coming over from the US.

Other economists have also commented on the ongoing effect of narrowing US Treasury yield premiums and the possibility of increased risk aversion from nervous traders. “Unfortunately for the BoJ”, said Mitul Kotecha of Credit Agricole, “the ongoing narrowing in the US Treasury yield premium over Japan JGB yields overwhelmed the negative impact of its action on the JPY. The JPY barely flinched when the Bank of Japan announced an expansion of its asset purchase fund by JPY 10 trillion in its aim to reach a 1% inflation goal. Overall, my quantitative models continue to show USD/JPY lower over the short term”, he added, “with a move below 80.00 on the cards.

“If as I expect, risk aversion also creeps higher, it will imply more short term upside JPY pressure. Trading will be relatively quiet, with no major data on the calendar due to Golden Week holidays in Japan.”

Elsewhere in the Asian markets, heavy demand saw last week become of the highest recorded in primary Asian credit. The iTraxx series 17 IG index recorded a close out 3bp better on the day at plus 162bp bid and CDS is 2bp-3bp better across the board. But flow is relatively light ahead of a public holiday for most of Europe tomorrow and US non-farm payroll data which is likely to exert the biggest influence over near-term market sentiment.

Amongst some of the biggest Asian performers last week was China’s property segment, which outperformed the cash market by around 1-2 points. Asia high-yield has also been a consistently strong performer in a global context, with the asset class tightening 24bp last week versus a 10bp tightening each for US and European high-yield. And, providing yet more fodder for bulls, Asian high-yield managed to tighten on the seasoned curve despite the fact that there has been an obvious switch into primary from the recent issuance for investors to execute.

This week, however, all eyes will be on the US as economic data released Friday is likely to dictate the pace of corresponding economies around the globe. US Q1 revealed a damp squib of a GDP (up 2.2 percent as opposed to the 2.5 percent predicted), a fact which makes this Friday’s figure all the more salient, particularly for Asian spreads.

Sarah Cox, Staff Writer