Hozzászólás

Morning Adviser Americas 9/22/2010 12:49:00 PM

Dollar Weaker

By Geoffrey Yu

The US dollar continued to weaken in the wake of the FOMC as markets priced in the prospect of a further round of quantitative easing later this year. Yesterday's Fed statement was more dovish than the August statement, though changes compared to Bernanke's Jackson Hole speech were perhaps a bit more subtle. While the growth outlook was unchanged, the Fed had a downgrade to its inflation assessment.

The FOMC noted that "Measures of underlying inflation are currently at levels somewhat below those the Committee judges most consistent, over the longer run, with its mandate to promote maximum employment and price stability." The policy guidance sentence was changed a bit to "the Committee will continue to monitor the economic outlook and financial developments and is prepared to provide additional accommodation if needed to support the economic recovery and to return inflation, over time, to levels consistent with its mandate."

The phrase "prepared to provide additional accommodation if needed" compares to the August statement language of "will employ its tools as necessary to promote economic recovery and price stability." With the downgraded assessment of inflation and the fact that the Fed was "prepared to provide additional accommodation if needed," the market interpreted this as the FOMC committee leaning toward further quantitative easing and as a result, the US 2y yield came under pressure and USDJPY moved lower.

Our US economists continue to expect a recovery in activity and believe that core inflation has bottomed - an outlook which argues against further quantitative easing.

Research Spotlight "Lower QE Bar, Lower Dollar" UBS G10 FX Strategy

With the Federal Open Market Committee deciding to lower the bar for renewed quantitative easing, risks to the dollar have shifted to the downside. As the Fed's move suggests it will add to liquidity even without economic growth deteriorating further, currency markets are likely to be wary of the dollar in the near term. Ahead of the November FOMC meeting, EURUSD should remain in a 1.30-1.40 range and USDJPY in an 83-87 range. USDCHF should trade within 0.95-1.02 and cable within 1.50-1.60. Please see the "Lower QE Bar, Lower Dollar" note on www.ubs.com/fx for details.

EUR Targets : EURUSD 1m 1.28, 3m 1.15

The Portuguese bond auction was relatively firm. Bid to cover ratios came in at 4.9x and 3.5x for the 10 year and 4 year bonds respectively, though the yields were both higher. Spread of Ireland and Portugal over bunds had already risen sharply ahead of the auction, clearly showing that even though investors are still willing to fund these economies, the challenges remain immense.

Industrial new orders were much weaker than expected at -2.4%m/m (cons. -1.4%m/m) and +11.2%y/y (cons. 16.2%). Eurozone consumer confidence is due later this afternoon.

JPY Targets : USDJPY 1m 85.00, 3m 95.00

BoJ Board Member Miyao said that the BoJ would continue to provided ample liquidity but has no preset idea about future policy. Miyao said that an increase in the pace of monthly JGB buying is one option. While the BoJ has traditionally been less then enthusiastic in its assessment of the benefits of past episodes of quantitative easing, intriguingly Miyao said that how the policy is assessed today could differ from how it was assessed in the past. This is the clearest sign yet that further BoJ easing could be on the cards in the near term.

On the back of the falling dollar, PM Kan reiterated Japan's active plans for intervention in the currency markets, stating that intervention would be unavoidable" if the market pushes JPY stronger. It appears that policymakers have set a clear floor for the currency which will be habitually maintained if and when it is breached.

GBP Targets : GBPUSD 1m 1.50, 3m 1.35

BoE minutes fell broadly in line with expectations, showing an 8-1 vote split, with Andrew Sentence again calling for a rate hike. Sentence effectively revealed this information in an interview last night where he stated that the UK should "gradually move interest rates up in a slow way which will not destabalise business confidence".

The minutes paralled the FOMC meeting yesterday, with increased support for further QE and the members sharing the sentiments that the UK should be active in its policy if and when it is needed.

NOK Targets : EURNOK 1m 7.80, 3m 7.60

Norges Bank is due to announce its latest policy decision. Our European economists are in line with the consensus and expect no change to the policy rate.

CAD Targets : USDCAD 1m 1.02, 3m 1.02

Canada's headline CPI came in lower than expected at -0.1% m/m and 1.7% y/y. Core CPI came in on expectations at +0.1% m/m and 1.6% y/y. Retail sales for July are due later today. We remain long USDCAD at 1.0260 as a trade recommendation, targeting a rise to 1.0650 with a stop at 1.0050.

NZD Targets : NZDUSD 1m 0.74, 3m 0.70 The NZD rallied overnight as the head of the DMO said that there is clear scope for the NZD to appreciate in the medium term. His comments may reflect a bid to increase the attractiveness of NZ bond, but they will not be welcomed by the RBNZ which is already fearing a turn in general conditions and sticking to a relatively neutral stance for now.

FX Technicals

EURUSD NEUTRAL Climb through 1.3334 has scope for 1.3509 and 1.3818 next. Near-term support comes in at 1.3058 ahead of 1.2830 USDJPY NEUTRAL Pullback from 85.93 targets 84.05 ahead of 82.88. GBPUSD BULLISH Model is bullish; while support at 1.5297 holds, expect gains to target 1.5729 ahead of 1.5999 USDCHF BEARISH Break through 0.9933/18 region reinstates the bearish trend. Next support lies at 0.9786 ahead of 0.9625. Resistance at 0.9983 intraday high. AUDUSD BULLISH Slashed through 0.9500 and 0.9563 thus exposing next resistance at 0.9850. Near-term support is at 0.9442 ahead of 0.9309 USDCAD NEUTRAL Violation of 1.0216 exposes 1.0108 ahead of 0.9931. Resistance comes in at 1.0351 ahead of 1.0509 EURCHF NEUTRAL Recovery found resistance at 1.3391 ahead of 1.3482 retracement level. Near-term support comes in at 1.2991 EURGBP NEUTRAL Next resistance lies at 0.8609 ahead of 0.8774. Support comes in at 0.8390 ahead of 0.8311 EURJPY NEUTRAL Break of 114.74 would put odds in favour of positive tone. Next resistance at 116.68. Support holds at 110.66 ahead of 107.73.