No Sympathy
Those hoping for a clear show of sympathy from the Fed today were disappointed – no QE, no IOER cut, no discount window scheme, and not even a change in the “late 2014” guidance. US dollar bulls reasserted themselves, but were held back somewhat by the Fed’s admission that “economic activity decelerated somewhat over the first half of this year” and “the Commission will closely monitor incoming information on economic and financial developments and will provide additional accommodation as needed”. Indeed, the overall US macro picture remains sufficiently murky to keep the door open for further Fed easing in September. Indeed, our baseline view is that the Fed will tap the discount window lending option, providing access to even lower cost funding to banks that meet certain lending targets in an attempt to kick-start the monetary transmission mechanism. The point to stress from a currency perspective is that discount window lending would be collateralised and conditional, so the sense of ‘debasement’ would not be significant enough for us to abandon our bearish EURUSD call – particularly in an environment where expectations for the upcoming ECB meeting have been raised to the point where the scope for disappointment is high. Our European economics team expects no ECB rate cut, but rather a formal endorsement of the reactivation of the SMP – without any guidance on size, target bond yield/spread, pace, or even the timing of the programme. Judging from recent comments by German officials, even this is far from a done deal. Today’s mixed bag of US data (July ADP employment up 163k; July ISM manufacturing index at 49.8) predictably had little market impact in a market now looking ahead to the key policy decisions from the BoE and ECB.
Click here to read the full report: UBS Morning Adviser Asia
UBS Investment Bank