Stronger Payrolls, Stronger Euro
The better than expected US employment report for July has not stood in the way of the EURUSD rebound. While the unemployment rate did tick higher to 8.3% (8.254% to be exact), the 163k rise in non-farm payrolls – with only a minor net downward revision of 6k for the previous two months – will dampen the perceived risk of further Fed easing ahead of the Jackson Hole conference later this month and the September FOMC meeting. After a brief dip immediately after the payrolls release, EURUSD squeezed higher beyond 1.23, feeding off the improved tone in the equity and peripheral bond markets. Hopes for a ‘quick fix’ prior to the ECB meeting were clearly overdone, and Thursday’s retreat seems to have given way to a more sober assessment of the ‘Draghi Plan’. Though the policy initiatives seen thus far do not constitute a game changer in our view, those in the ‘half full’ camp can argue that Draghi has at least reinforced the framework within which Spain and Italy could apply for support from the EFSF/ESM and hence the ECB – perhaps without any further tightening of conditions beyond those already in place. The focus on yield levels, rather than the functioning of the bond market, is also a notable departure from the confines of the SMP that will foster hopes of an effective yield-targeting regime. And preferred creditor status for the ECB on the bonds it holds in the programme will probably not apply. Note that we have closed our 2m (13-August-2012 expiry, NY cut) 99 v 96 EUR put / JPY call spread for 1.04% profit (spot ref: 96.41). Inherent here is our recognition of the risk that (i) the euro could continue to edge higher near term, purely on the chance that Spain applies for an aid package with no further strings attached, and (ii) the yen may soften on speculative flow ahead of the BoJ decision on August 9. However, our longer-term bearish euro view has not changed, and we remain short euro via three other structures: EURGBP put spread; EURJPY put w/ RKO; EUR digital put w/ KO. All are longer-term structures and are thus not as susceptible to shorter-term risk squeezes. The Japanese Leading Index and Bernanke’s speech on “Economic Measurement” are up next on a light events calendar ahead.
Click here to read the full report: UBS Morning Adviser Asia
UBS Investment Bank