Yield Watch
Our bullish US dollar view remains intact. Granted, Friday’s ‘underwhelming’ US headline data prints weighed on the US currency – the University of Michigan consumer sentiment index slipped to 74.3 in early March from 75.3 in February; industrial production was unchanged m/m in February; and the y/y reading for core consumer prices slowed to 2.2% in February from 2.3% in January. Yet, this should not mask the positive momentum in the US economy, as the University of Michigan report included key improvements in labour market assessments, while manufacturing production was up 0.3% m/m in February. Moreover, at a 1.9% annual rate in the past three months, core consumer prices are still growing at a faster clip than the 1.7% recorded last October. In fact, thanks in large part to what has transpired in the US, our global asset allocation team has declared a secular turning point for bonds into a long-term bear market. Our baseline scenario now pegs 10-year UST yields at 2.7% at the end of 2012 (vs 2.4% previously) and 3.3% at the end of 2013 (vs 3.0% previously), with the Fed starting to hike rates in 2013 – defying the Fed’s late 2014 guidance. This should support currency pairs like USDCHF and USDJPY, which tends to track UST-JGB yield spreads particularly well – underpinning our three-month target of 85. With perceived European ‘tail risk’ having been reduced, the data and comments from Fed officials should figure more prominently in the FX equation. This week’s US data focus will be on housing, and we suspect the results should be USD-positive. UBS expects the housing market index due later today to rise to 31 in March from 29 in February, eclipsing the consensus estimate of 30. The main near-term risk to our stronger US dollar call would be any dovish talk from the Fed. Today’s speech by New York Fed President Dudley plus appearances by Fed Chairman Bernanke on Tuesday, Thursday and Friday will be closely watched. So long as Bernanke does not drop any ‘QE3’ hints as we suspect, the US dollar should be well supported.
Click here to read the full report: UBS Morning Adviser Asia
UBS Investment Bank