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Morning Adviser Americas 10/6/2010 11:12:00 AM

Don't Chase EURUSD

By Manuel Oliveri

Risk sentiment stayed supported in Europe, echoing the strong performance of US equities on Tuesday and rising expectations of more Fed QE. A Wall Street Journal interview yesterday with Chicago Fed President Evans, a 2011 FOMC voter, stoked investor expectations of more Fed action as he said the Fed needs to do much more to aid the economy. EURUSD traded 1.3830-1.3882 and USDJPY 82.91-83.15. The ADP employment change and Canada's Ivey PMI are scheduled for release.

Research Spotlight "QE & Conventional Wisdom" UBS G10 FX Strategy

Conventional wisdom has it that quantitative easing is bad for the local currency but good for risk assets. The first part of the statement is hard to dispute. The second part has so far proven to be correct, but will stop being so once the market realises that further QE may well fail to stimulate the economy. Once monetary policy is recognized as powerless, risk aversion will likely result. Investors are already hedging for this by buying gold and the Swiss franc. Look for more to come. Please see the "QE & Conventional Wisdom" note on www.ubs.com/fx for details.

EUR, CHF Targets: EURUSD 1m 1.35, 3m 1.25

At 3.4% m/m (cons. 0.8%, prev. -2.2%) German industrial orders for August were released well above expectations. However, the time series is a highly volatile one and again large orders have impacted the release strongly. Nevertheless, according to the Economy Ministry growth still points to the upside, even after extracting large orders.

In Switzerland, SNB reserves for the month of September have been released. Reserves dropped to CHF218bn from CHF 251bn previously. The drop was related to valuation changes. Going forward, the quarterly composition of reserves will be released on October 21, which will provide more insight into the SNB's diversification strategy.

We advise against buying EURUSD around current levels, as positioning, rate expectations and growth prospects remain key risks to the pair. In addition Fed quant easing expectations are increasingly priced in. On a different note and as suggested by our equity flow monitor the Eurozone does not benefit from further risk related capital inflows, as the higher trade weighted EUR is increasingly regarded as a weight to export competitiveness while domestic demand remains muted. Hence we keep our short term EURUSD forecasts at 1.35.

Going forward, tomorrow's ECB press conference will be the next key event closely followed.

JPY Targets: USDJPY 1m 85, 3m 85

After yesterday's policy surprise from the BoJ there were no market-moving developments during the Asia session. USDJPY remains close to its 15-year lows after initially rising on the back of yesterday's policy decision.

The currency pair remains mostly driven by developments in the US, and given the Fed's stance on monetary policy the pair may remain capped.

GBP Targets: GBPUSD 1m 1.59, 3m 1.47

According to the Recruitment and Employment Confederation, the permanent job placements balance fall again from 56.3 to 54.6. According to our economist the survey still points to positive employment growth, but at the lowest pace in a year and below the long run series average of 55.8.

CAD Targets: USDCAD 1m 1.02, 3m 1.06

BoC Senior Deputy Governor Macklem said that the current policy rate at 1% ensures that financial conditions remain expansionary, a setting he described as appropriate. However, he indirectly raised the possibility of further accommodation, noting that the BoC's move away from its emergency policy stance provides some flexibility if the Fed eases further. He also said the BoC becomes concerned about the CAD if it turns volatile, but would only intervene in exceptional circumstances.

The Ivey PMI for September will be released today. At 62.0 (prev. 65.9) consensus expectations target a lower reading.

FX Technicals

EURUSD BULLISH Momentum is positive; the pair targets 1.3896 with scope for 1.4194 next. Near-term support holds at 1.3637 ahead of 1.3381 USDJPY BEARISH Look for a break below 82.88 for extension of bearish trend towards 79.75. Resistance remains at 83.99 ahead of 85.40. GBPUSD BULLISH Move above 1.5999 and 1.6069 would expose 1.6276. Support at 1.5670 ahead of 1.5503 USDCHF BEARISH Clearance of 0.9709 exposes 0.9590 and 0.9500 next. Resistance at 0.9918 breakout low. AUDUSD BULLISH Rise through 0.9751 exposes 0.9850 key resistance. Initial support defined at 0.9542, yesterday's low. USDCAD BEARISH Focus is on downside; initial support lies at 1.0108 ahead of 0.9931. Resistance comes in at 1.0380 EURCHF BULLISH Violation of 1.3467 would pave the way for a move towards 1.3651 ahead of 1.3924 key resistance. Support at 1.3265 ahead of 1.3165. EURGBP BULLISH Next resistance above 0.8738 lies at 0.8808. Support holds at 0.8563 ahead of 0.8510 EURJPY BULLISH Expect gains to extend towards 116.68 and 119.33 next. Near-term support comes in at 112.98 ahead of 115.53.