Morning Adviser Americas 10/1/2010 11:22:00 AM
Europe PMIs Mixed
By Geoffrey Yu
The dollar-positive effects of yesterday's firm US data began to wear off overnight as the euro, pound and sterling all gained ground. Mixed PMI results across Europe led to fairly rangebound equities. A better-than-expected China PMI reading temporarily supported the aussie; weaker-than-expected Australia PMI was ignored. EURUSD traded 1.3620-1.3763 and USDJPY 83.16-83.58. University of Michigan confidence, ISM Manufacturing, core PCE and deflator data for August are due today.
Yesterday's positive US data may have given investors pause in their expectation for further quantitative easing, but QE concerns will persist unless we see continued data improvement. And it will be key how Treasury yields react to the data releases, as higher yields could provide some respite for the dollar.
Research Spotlight "Soft September For Dollar" UBS G10 FX Strategy
Foreign exchange was eventful in September due to significant policy shifts. Fed expectations played a dominant role. Global data was acceptable by recessionary standards, but with deflation risk apparently rising in the US, investors concluded that further quantitative easing from the Fed will be the only way out. The dollar suffered broadly and significantly on the prospect of debasement and consequent exit of funds. Please see the "Soft September For Dollar" 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
News emerged of a Swiss tax treaty with Germany. With CHF deposits accounting for almost half of all foreign deposits in Switzerland, tax amnesties are generally CHF negative and EURCHF should see some upside as the Eurozone members chase the funds.
PMI results across the Eurozone mixed, and pointed towards a divergence in growth prospects. A slowdown in output to 54 and new orders to 53.2 suggests manufacturing growth is stalling, with the main driver being a slowdown in German export growth. This is not particularly surprising given the strong growth seen previously, but highlights the importance of the German export sector to the overall figures, as the effects of a generally more stable picture in France and Italy were nullified. EU unemployment was also slightly worse than expected, at 10.1% for September.
Chinese PM Wen will visit Europe next week in an attempt to propose what Xinhua call "practical actions" to help solve Europe's continuing woes. The three countries he will visit, Greece, Italy and Belgium are the most indebted in the Eurozone. Greece last year sold a 35-year lease for two piers to a Chinese state-owned company, and the state of Europe's finances might play heavily on the mind of Wen as some relatively good-valued assets might be up for grabs.
JPY Targets: USDJPY 1m 85, 3m 85
CPI excluding fresh food improved slightly, as expected, to -1.0% (prev. -1.1%). Prime Minister Kan said, in a clear reference to next week's policy meeting, that he hopes the BoJ will take further necessary steps to beat deflation. Both he and Finance Minister Noda also said that Japan will continue to take decisive steps as needed to counter the yen's rise.
The Japanese Government have indicated that they will also try to work with BOJ and will press the urgency for any future interventions to remain unsterilized, as the deflationary fears still need to be addressed.
Ministry of Finance data revealed that Japan undertook JPY2.1249tn of FX intervention in the month of August 28-September 28 (approximately $25bn). This was broadly inline with market estimates and suggests that intervention was limited to a single day.
CAD Targets: USDCAD 1m 1.02, 3m 1.06
July monthly GDP was negative as expected and BoC Governor Carney again cautioned on the economic outlook, similar to the latest BoC statement. He stressed the unusual uncertainty surrounding the outlook and reiterated that future monetary policy moves would have to be carefully considered. The BoC raised the policy rate at its last meeting but the concerns of further Fed easing have tempered expectations for the BoC's policy rate path, which has weighed on the Canadian dollar.
NOK, SEK Targets: EURNOK 1m 7.80, 3m 7.60 / EURSEK 1m 9.35, 3m 9.30
Norwegian PMI broke the 50 mark for the first time in over 2 years rising to 52.8 from 49.4. However, unemployment came in slightly worse than consensus at 2.8% and recent data could have persuaded Norges Bank to pause in its current tightening cycle. We still see downside for EURNOK however, given relative value.
Swedish PMI strongly beat consensus posting a figure of 63.3. This is another sign that the fundamentals remain strong, although the Eurozone concerns are weighing on Riksbank committee members and keeping the EURSEK downside limited.
FX Technicals
EURUSD BULLISH Violation of 1.3692 paves the way for another bullish run towards 1.3896 next. Near-term support comes in at 1.3560 ahead of 1.3381 USDJPY BEARISH Focus is back on the downside; break of 82.88 would expose 79.75. Resistance remains at 84.50 ahead of 85.40. GBPUSD BULLISH Bull stalls in front of 1.5999 key high; support at 1.5670 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 The pair 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 1.0380 and 1.0192 have become important near-term directional triggers EURCHF BULLISH Following the break of 1.3391 model had turned bullish. Need a break above 1.3924 to confirm the positive trend. EURGBP BULLISH As long as support at 0.8463 holds, expect the pair to target 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.
