Morning Adviser Europe 9/30/2010 6:01:00 AM
Focus On Ireland
By Gareth Berry
The dollar managed to stage a mild recovery during the Asia session as economic data in Australia, New Zealand and Japan took a turn for the worse. EURUSD traded 1.3593-1.3647, USDJPY 83.48-83.82. Nevertheless, the potential for a further round of Fed quantitative easing remains a dominant influence on price action. San Francisco Fed President Yellen and nominee Ruskin were confirmed by the Senate, and will now be able to take their places on the Fed's Board of Governors. Several Fed officials also spoke. Boston Fed President Rosengren, a 2010 FOMC voter, said the Fed should vigorously and creatively use policy options to combat a slow recovery and "undesirably low" inflation. But he also warned that benefits of unconventional policies are harder to track and more easing should depend on incoming data. Minneapolis Fed President Kocherlakota was slightly more middle-of-the road as he envisions "muted" effects from further asset purchases on Treasury yields. He remained open-minded on which tool the Fed could use next but said the US needs to get its fiscal side in order in the longer run. And Philadelphia Fed President Plosser worried about the downside effects of further easing though he would back it if deflationary expectations emerge, which he does not expect. Kocherlakota and Plosser are voting members in 2011. The varying opinions suggest the FOMC will wait and watch data for now. But officials do seem more in agreement on labour market concerns and on the need for more fiscal moves. The second revision of Q2 GDP is due along with jobless claims and Chicago PMI. Fed Chairman Bernanke testifies on regulatory reforms.
Key Events
30 September 2010 Source: UBS Global Economics Country GMT Release/Event Frequency UBS Prev/Revised Consensus Actual UK 07:00 BoE's Paul Tucker Speaks Germany 07:55 Unemployment Rate sa (Sep) % 7.50% 7.60% 7.60% Euro Area 09:00 Euro-Zone CPI Estimate (Sep) y-o-y 1.90% 1.60% 1.80% Canada 12:30 GDP (July) m-o-m -0.10% 0.20% -0.10% United States 12:30 GDP (Annualized) (Q2 T) q-o-q 1.50% 1.60% 1.60% United States 12:30 Core PCE (Q2 T) q-o-q n/a 1.10% 1.10% United States 12:30 Initial Jobless Claims (Sep-25) lvl 460K 465K 460K United States 13:45 Chicago Purchasing Manager (Sep) index 56.0 56.7 55.7 United States 14:00 Fed's Bernanke Testifies Canada 16:35 BoC's Carney Speaks United States 18:30 Fed's Bernanke Speaks
Research Spotlight "Swiss Franc Like Gold" UBS G10 FX Strategy We think the Swiss franc will be a major beneficiary of any additional quantitative easing. Like gold, the franc is an ultimate safe haven in a world fearing currency debasement and competitive devaluation. Although the franc is now expensive from a fundamental perspective, safe-haven flows may be largely indifferent. Positioning isn't heavy either, aside from speculative interest. Our one- and three month EURCHF targets are 1.3000 and 1.2800, respectively. Please see the "Swiss Franc Like Gold" note on www.ubs.com/fx for details.
EUR, CHF Targets: EURUSD 1m 1.35, 3m 1.25 / EURCHF 1m 1.30. 3m 1.28 Our European economists believe the French 2011 Financial Bill represents the first step on a long journey but they note that the proposed deficit is still far from sustainable. Sovereign deficits continue to weigh on investor sentiment and EU Commission President Barroso said Portugal needs to show it is serious about tackling its deficit issues. The Irish central bank announced that the domestic banking system will required further government-sponsored capital injections. The Irish Finance Minister said that holders of subordinated debt of a nationalized bank would be expected to make a significant contribution to the bailout.
JPY Targets: USDJPY 1m 85, 3m 85 Key August economic data was weak with retail sales softer than expected, rising only +1.4% m/m (cons. +1.9%, prev. +0.7%). Industrial production rose by +15.4% y/y, considerably short of expectations of +16.9% y/y. The yen weakened very slightly on the numbers, demonstrating that US yields continue to be the principal driver in the pair.
CAD Targets: USDCAD 1m 1.02, 3m 1.06 Canadian Finance Minister Flaherty said the economy is on track for the year even if the upcoming July GDP print may turn out to be negative, which is in line with consensus expectations. But at this stage, the US recovery is a larger driver and has kept the CAD under pressure versus the rest of the G10. Even if the Canadian recovery remains on track, the BoC policy rate outlook could be tempered given the Fed's potential to ease further.
AUD Targets: AUDUSD 1m 0.96, 3m 0.93 The AUD came under mild selling pressure after some weak economic data. Building approvals fell -4.7% m/m (cons 0.0%, prev. 0.1%) and the annualized figure rose by less than expected at +4.4% y/y (cons. +10.8%, prev. +11.1%). Private lending growth also disappointed coming in at +0.1% m/m (cons. +0.3%, prev. +0.3%). Our Australian economics team believes that this is further evidence of weakness in forward-looking indicators of housing activity. They continue to expect the RBA to start the next phase of the hiking cycle this year, most likely October, but it could be November.
FX Technicals
USDCHF next support at 0.9625 EURUSD BULLISH The gains are expected to move towards 1.3692 and 1.3896 next. Near-term support comes in at 1.3381 ahead of 1.3287 USDJPY BEARISH The break of 84.05 brings our focus back on the downside at 82.88. Resistance remains at 84.50 ahead of 85.40. GBPUSD BULLISH Bullish pressure held at 1.5895 ahead of 1.5999 key high; scope for 1.6253 next. Support is defined at 1.5719 ahead of 1.5503 USDCHF BEARISH Next support below 0.9625 lies at 0.9500 psychological level. Resistance at 0.9918 breakout low. AUDUSD BULLISH Upside potential is expected to target 0.9850 with scope for 1.000 psychological resistance next. Support is at 0.9559 ahead of 0.9463. USDCAD NEUTRAL 1.0509 and 1.0108 mark the near-term directional triggers EURCHF NEUTRAL Trading in a choppy manner within 1.3391 and 1.2991 range. EURGBP BULLISH Break through 0.8606/0.8609 resistance area exposes 0.8736 ahead of 0.8808. EURJPY BULLISH Momentum is positive; clearance of 114.74 would expose 116.68 and 119.33. Near-term support comes in at112.67 ahead of 110.66 *NOTE: The trend for each currency pair as defined in the table is determined by our proprietary model and is independent of our discretionary interpretation of price action
