Morning Adviser Americas 9/23/2010 11:16:00 AM
That Sinking Feeling
By Geoffrey Yu
Markets moved into slightly risk-averse territory overnight. A poor GDP result from New Zealand got the ball rolling. Europe followed suit on continued sovereign issues and the lowest reading (55.3) on Eurozone manufacturing PMI in a year. To be sure, holidays in Japan, China and Korea compromised liquidity. USDJPY traded 84.41-84.67 and EURUSD 1.3312-1.3413.
US President Obama is due to meet China's Premier Wen and Japan's Prime Minister Kan for bilateral talks at the United Nations. The US House Ways and Means Panel has already scheduled a meeting on Friday to vote on the China currency bill, with a full vote next week, and Premier Wen will likely now want assurances from President Obama that this bill will not lead to material damage to China.
US data due is initial jobless claims and August existing home sales and leading indicators.
Research Spotlight "Home Truths" UBS Global Investment Strategy
House prices play a vital role in credit and consumer price formation, and overall economic activity, largely because of their impact on bank balance sheets and household confidence. While most valuation metrics are healthier than 2-3 years ago, they still do not suggest that house prices are cheap. The absence of value-based purchasers is likely to keep a ceiling on prices, alongside legacy effects from the financial crisis, making for a sub-par recovery and lingering dis-inflationary trends. Please see the "Home Truths" note on www.ubs.com/fx for details.
EUR Targets : EURUSD 1m 1.28, 3m 1.15
Mixed news from Ireland as two T-Bill auctions came in with strong demand, while GDP data was disappointing. Bid-Cover ratios on the Feb 2011 and April 2011 auctions were 4.08 and 11.7, respectively. This again follows the trend of bond and CDS spread widening in between auctions, while the auctions themselves show relatively strong demand. The Irish 10y-Bund spread reached an historical high overnight, widening 21 bps on the back of comments from the Director of Ireland's National Asset Management Agency that the subordinated debt of a prominent Irish commercial lender lacked guarantees.
GDP figures were well below consensus of +0.5%, registering a quarterly decline of (-)1.2% and casting further doubt on Irish policymakers. Q1 growth was revised down on the back of this from 2.7% to 2.2%
Portuguese spreads followed Irish movements, also posting record highs of 400bp.
GBP, NOK Targets : GBPUSD 1m 1.50, 3m 1.35; EURNOK 1m 7.80, 3m 7.60
We sell GBPNOK at 9.22 with a stop at 9.40 and a target of 8.80. In the BoE MPC minutes published yesterday, some members said there may be need for more quantitative easing in the UK. In contrast Norges Bank kept interest rates unchanged at 2% yesterday but signalled that it wanted rates to rise to 'more normal levels'.
NZD Targets : NZDUSD 1m 0.74, 3m 0.70
The NZD fell sharply on the release of Q2 GDP figures that fell well short of expectations at +0.2% q/q (cons. +0.7%), and +1.9% y/y (cons. +2.5%). Our New Zealand economist sees this latest report as further evidence that the RBNZ will leave the OCR unchanged at 3.0% for the rest of this year. He does not expect another hike to the OCR until March.
