Not Yet
All eyes are on the FOMC, though our view is that any further easing is far more likely at the September meeting, when we will see the new Summary of Economic Projections and a press conference by Chairman Bernanke. In the interim, the Fed will have two additional months of employment data to peruse, and the Jackson Hole conference at the end of August will provide Bernanke with a timely opportunity to prepare the market for any easing decision. Our US economics team believes that the Fed’s next move in September will not be in the form of further UST or MBS buying, but rather via its discount window facility. Specifically, the Fed could initiate a programme providing access to even lower cost funding – perhaps at zero – to banks that meet certain lending or possible debt forgiveness targets. This would effectively subsidise banks for behaving as the Fed prefers in an attempt to jumpstart the monetary transmission mechanism. The point to stress from an FX standpoint is that discount window lending would be collateralised and conditional, so the sense of ‘debasement’ for the US dollar would be less acute under this framework than full-blown QE. Indeed, this does not alter our bearish EURUSD call, particularly given the risk of disappointment from the ECB on Thursday in a market that is expecting Draghi to formally endorse bond purchases in some form – most likely through a reactivation of the SMP. Comments from German Finance Ministry and Bundesbank officials suggest that SMP reactivation is not a done deal, let alone the contentious issue of granting the ESM a banking license. Today’s positive US data surprises (May house prices up 0.9%; July Chicago PMI up to 53.7; July consumer confidence index up to 65.9) had little impact, with the focus clearly on the FOMC – and before that, the PMI parade from China, Sweden, Norway, Germany, the UK, and the US
Click here to read the full report: UBS Morning Adviser Asia
UBS Investment Bank