Risk Steadies Pre-Payrolls
It appears that markets are choosing to reassess their initial reaction to yesterday’s ECB decisions and decided that things are not so bad after all. The euro has traded firmly back above 1.22, in a rage of 1.2178-1.2269 overnight, while USDJPY traded 78.07-78.31. A few perceived ‘red lines’ of previous quarters may have been breached, despite the ‘one’ reservation which was pretty obvious to all, but now the details are in the implementation. Regardless of how investors feel about the ECB at this stage, with the benefit of hindsight perhaps it is wise never to expect too much as even central bankers know that there are some aspects of crisis resolution which are beyond their control – be it trying to accelerate a recovery in the US or pushing for structural changes in the Eurozone. Within their restricted remits though, both the Fed and ECB will need to push the boundaries, but Bernanke and Draghi both know things must happen in the right order and under the right conditions. The ECB, often accused of being behind the curve, delivered a statement of intent but drew a clear line there, and EUR longs looking for the beginning of the end were forced to bail. Whether the Bundesbank’s clear objections delayed the Governing Council’s ability to push things forward with haste, or the collective Council did not want to remove incentives for reform that delayed a more full-on response is unclear, but the waiting game must continue, and to their credit, the ECB may yet have done enough to deter new downside trades. Promise of action on the short-end of the curve, the possibility of unsterilized operations, and the promise of ‘dealing with’ the seniority issue have provided enough assurance for now. Ahead today, markets look to payrolls (UBSe. 115k/8.1%, cons. 100k/8.2%) which have become almost an afterthought for an event-filled week. Given the Fed has already decided the impact may also be muted but a negative figure will give room for thought as the Fed Chairman prepares for his month-end Jackson hole meeting. We remain sceptical of the Fed to deliver new large-scale asset purchases, though some additional measures involving the discount window are still possible for the September meeting.
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UBS Investment Bank