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Morning Adviser Europe 9/10/2010 5:59:00 AM

Dollar Gains In Thin Trade

By Gareth Berry

The dollar gained further ground against its G10 peers during the Asia session, extending gains made earlier after better than expected jobless claims helped shore up investor sentiment. However, liquidity was extremely thin given the holiday across much of Asia and the Middle East, and so care should be taken not to over-interpret the price action. EURUSD traded 1.2644-1.2709, USDJPY 83.77-84.29. In response to the US data earlier, Treasury yields across the curve increased, gold dropped and equities closed modestly positive. While claims data may have been impacted from missing state reports due to the Labor Day holiday, a Labor Dept. analyst said subsequent reports were close to their estimates, which should negate the need for any large revisions. The US trade deficit in July also narrowed more than expected and this sustained pace would be positive for GDP as opposed to the large trade deduction from Q2 real GDP growth. St. Louis Fed President Bullard said economic growth will pick up in 2011 after a slower H2 2010 and the Fed still has more options "if needed." But he also said "shock and awe" is not a good policy and further easing would like involve buying longer-dated Treasurys. US data has improved from the recent soft patch but investors remain nervous on the outlook. There are no major releases or speeches scheduled.

Key Events 10 September 2010 Source: UBS Global Economics Country GMT Release/Event Frequency UBS Prev/Revised Consensus Actual Sweden 07:30 Industrial Prod. sa (July) m-o-m 0.70% 1.10% 0.70% Norway 08:00 CPI Underlying (Aug) y-o-y 1.50% 1.30% 1.40% Canada 11:00 Net Change in Employment (Aug) lvl 10.0K -9.3K 30.0K Canada 11:00 Unemployment Rate (Aug) % 8.00% 8.00% 8.00% Canada 15:40 BOC's Carney Speaks China Trade Balance (Aug) USD bn 29.60 28.73 26.90 China China Property Prices (Aug) index n/a 10.3 10.0 China New Yuan Loans (Aug) Yuan bn 460.0 532.8 500.0 China Money Supply - M2 (Aug) y-o-y 17.80% 17.60% 17.50%

Research Spotlight "Exit The Keynesians" UBS G10 FX Strategy Foreign exchange investors should be wary of fragile growth: while central banks aren't ready to resume QE, the governments of rich countries are set to squeeze their budgets more in 2011 than they have in over thirty years. Fiscal tightening presents risks to growth, so the safe-haven Swiss franc will remain in high demand. And because Europe wants to cut deficits quicker than the US does, the euro and pound will be hampered by monetary policy staying very loose. Please see the "Exit The Keynesians" note on www.ubs.com/fx for details.

EUR, NOK Targets: EURUSD 1m 1.2800, 3m 1.1500 / EURNOK 1m 7.80, 3m 7.60 Deputy Director Linehan of Ireland's debt agency, said Ireland was fully funded until June 2011 and noted "significant" improvement at today's treasury bill sale compared with the previous one. Ireland sold ?150.1mln February 2011 T-bills at an average yield of 1.925% and a b/c ratio of 9.4, and sold in addition ? 250mln of April 2011 T-bills at an average yield of 2.19 % and a b/c ratio of 5.4. Overall average yields fell as compared to the previous auction though they only reached the minimum of the targeted range. In a newspaper interview ECB President Trichet was non-committal about the time-frame over which ECB liquidity operations could be safely normalized.The ECB's Ordonez cautioned that ECB funding should not become a "permanent channel" for banks, which touches upon the recent financial sector worries and said they could not rule out more episodes of financial instability. ECB Governing Council member Mersch said there are first signs of a broad-based recovery in the Eurozone, and the next discussion on exit from non-traditional measures will likely occur at the December meeting. The final reading for August German CPI was in line with previous estimates. August CPI in Norway is due and the y/y underlying reading is expected to inch up to 1.4%. We remain skeptical of rallies in EURUSD and look for more euro downside, in particular versus USD and CHF.

JPY Targets: USDJPY 1m 85.00, 3m 95.00 The final Q2 GDP estimate was revised up significantly to +0.4% q/q from the previous estimate of +0.1% q/q. This was entirely in line with consensus estimates. Finance Minister Noda said that the GDP data confirm that a steady economic recovery continued into Q2. The BoJ minutes from the Aug 10 policy meeting revealed generally rising levels of concern over the yen's strength. Concerns were expressed that both exports and sentiment could be hurt, and that domestic firms could shift production abroad. However, one member of the board noted that a stronger yen also has benefits, such as reducing the cost of imports.

GBP Targets: GBPUSD 1m 1.50, 3m 1.35 The BoE kept policy unchanged as expected and accordingly there was no explanatory statement. At this juncture, while there is the prospect of more fiscal austerity ahead mixed with elevated current inflation, the minutes will be of more interest. The minutes should be released September 22. In data releases, the trade deficit in August widened more than expected.

CAD Targets: USDCAD 1m 1.0200, 3m 1.0200 USDCAD was relatively range bound after the positive US claims data and a disappointing Canadian trade deficit. Up next is labor data and consensus is looking for a monthly net change of +30k (UBSe 10k) for August with an unchanged unemployment rate at 8%. BoC officials remain cautious on the outlook although lower bond yields are helping offset some of the policy rate hikes, which has some investors still optimistic on the rate outlook. But stronger domestic data should help the CAD retain some interest as a relative value long play.

FX Technicals

AUDUSD resistance at 0.9389 EURUSD BEARISH Move below 1.2588 is required for the confirmation of bearish trend. Resistance holds at 1.2933 USDJPY BEARISH With the clearance of 83.60 bearish trend remains intact. Next support is at 79.75 key level. Short-term resistance is defined at 85.23 GBPUSD BEARISH Currently holds support at 1.5297; a break here would expose 1.5125/15 ahead of 1.4906. Near-term resistance lies at 1.5565 ahead of 1.5731 USDCHF BEARISH Still has room to go for 0.9918 ahead of 0.9786. On the upside resistance holds at 1.0239 ahead of 1.0466 AUDUSD BULLISH Momentum is positive; next resistance above 0.9389 is at 0.9850. Near-term support defined at 0.9055 ahead of 0.8771 key low USDCAD BULLISH Break of 1.0340 exposes 1.0248 ahead of 1.0108, but overall outlook is bullish. Initial resistance is at 1.0509 ahead of 1.0673 EURCHF BEARISH Bearish pressure held at 1.2766; break of the level would expose 1.2626 ahead of 1.2403. Resistance at 1.3163 EURGBP BEARISH Clearance of 0.8249 has exposed 0.8142 and 0.8068 next. Near-term resistance is defined at 0.8390 ahead of 0.8532 EURJPY BEARISH Bearish pressure eyes 105.44, scope for next support at 100 psychological level. Resistance is at 111.19 *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