Dollar Takes A Breather
The US dollar is taking a breather after the strong run-up in the past few days, but the data flow continues to be broadly supportive, underlining our ‘no QE3’ Fed view. Indeed, the downtrend in US jobless claims remains intact, with the latest reading for the week of March 10 dipping further to 351k (consensus 357k) from a revised 365k, a fouryear low. The four-week average of 356k was down from 366k a month earlier, 380k two months earlier, and a Q4 2011 average close to 400k. Our US economics team continues to expect the unemployment rate to drop to 7 ¾% at the end of this year and 7 ¼% at the end of 2013. In addition, the current activity indices in the Empire State (up to 20.2 in March from 19.5 in February) and Philadelphia Fed (up to 12.5 in March from 10.2 in February) surveys collectively provided a solid first read on manufacturing conditions for this month. US dollar bulls could also seek comfort from the latest TICS report, which showed that net foreign purchases of long-term US securities came in at USD 101.0 bn in January, topping expectations and the USD 19.1 bn print for December. USDJPY downside potential should be limited, as we maintain (i) the ‘home currency bias’ of Japanese investors will gradually fade in fiscal 2012, (ii) the BoJ will reinforce its ‘easiest for longest’ stance, and (iii) risks favour a widening of the 2y UST-JGB yield gap. Elsewhere, EURCHF finds itself back below 1.21 in the wake of the SNB’s Monetary Policy Assessment, which affirmed the need to keep the minimum exchange rate target at 1.20. Price action in EURCHF post-decision suggested there were opportunistic EURCHF longs positioned for stronger language on the FX floor, only to be disappointed after the fact. The ECB’s monthly report for March did not provide any sustained support for the euro, with inflation projected at 2.4% in 2012 and 1.6% in 2013 – against the backdrop of GDP growth rates of -0.1% and +1.1%, respectively. Ahead today, the focus will be on the US CPI, industrial production and Michigan confidence numbers.
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UBS Investment Bank