Narrow Rangers Prevail
Ranges were broadly flat overnight but the dollar has checked some of its advance amid fears that data is still not strong enough in the US for the Fed to continue allowing market to price out expectations for monetary easing. On Friday 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. These shifts need to take place in the context of a stronger US recovery and ever-widening policy divergence, though further policy guidance from the Fed is needed and at this point it remains too early to be over-expectant on the FOMC alone. In addition, the dovish tone from several minor central banks of late suggest that the ‘risk-on, high-yield on’ framework could also be changing as these nations are seeing clear downside risks to their manufacturing sectors. 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. Overnight EURUSD traded in a range of 1.3156-1.3187, USDJPY 83.36-83.56.
Click here to read the full report: UBS Morning Adviser Europe
UBS Investment Bank