More QE?
The weaker than expected US employment data – total payrolls up 69k; private payrolls up 82k; unemployment rate up to 8.2%; ‘underemployment’ rate up to 14.8% – effectively conspired to magnify expectations of further Fed easing against the backdrop of a sharp decline in US equities. Indeed, after moving lower in response to the jobs data, EURUSD reversed course, further aided by market speculation of a reactivation of the SMP by the ECB. The euro managed to shrug off a downgrade in Italy’s sovereign rating to B+ from BB (outlook negative). Perhaps the most telling barometer was the rally in gold, exacerbated by the high degree of short positioning. USDJPY was also volatile, as the initial post-payrolls slump gave way to a sharp bounce on market speculation of FX intervention by the Japanese authorities. There was no confirmation by Japan’s MoF, with Vice Finance Minister Nakao simply issuing a “no comment”. Nonetheless, market talk of rate checking and fears of ‘covert intervention’ should keep the USDJPY bears on edge, particularly in the light of the stepped-up rhetoric from Finance Minister Azumi. The 53.5 print for the US ISM manufacturing index also undercut expectations, but the ‘miss’ was relatively small and optimists could seek some solace from the rise in the new orders component to 60.1 in May from 58.2 in April. Virtually lost amid all the action were the results of the Irish referendum, which produced a “yes’ vote among 60.3% of voters, basically in line with advance indications. While Friday’s FX moves were exacerbated by thin conditions ahead of the weekend, the general weakness in global manufacturing PMIs (including the Eurozone, UK, and China) plus continued uncertainty ahead of the Greek election on June 17 should keep the ‘risk off’ theme intact to the benefit of the funding currencies. Note that we have lowered the stop on our short AUDUSD trade (initiated on May 4 at 1.03) to 0.9740 from 0.9910 previously, targeting 0.9500. More nervous trading can be expected in the coming week, with the spotlight on the upcoming BoE, BoC and ECB meetings, not to mention Bernanke’s testimony before the Joint Economic Committee. The recent run of disappointing US data will likely prompt a revision of the economic assessment in the FOMC statement, which may be signaled and/or previewed by Bernanke. While our US economics team does not see the weak May jobs report as being sufficient for the Fed to move toward further easing at the June 19-20 meeting, Bernanke’s comments will certainly be closely monitored for any QE hints.
Click here to read the full report: UBS Morning Adviser Asia
UBS Investment Bank