Risk Keeping Buoyant
Risk assets have begun the week in rude health as a firmer US data, a fresh interpretation of the ECB’s latest maneuvers and some buoyant news out of Asia have all contributed to a rebound in risk demand. The week ahead sees limited data releases and given markets were probably caught up in a little excessive negativity heading towards the tail-end of last week, there is quite a bit of catch-up to expect. Overnight EURUSD traded in a range of 1.2378-1.2443 and USDJPY 78.35-78.63. The payrolls number were broadly better in June, which our economists note reflected payback for earlier exaggerated weakness. The July pace was very close to previous trends, and overall we still do not see any reason to change our view on Fed policy in the immediate future. The rise in the unemployment rate was attributed to a modest rise in unemployment coupled with a drop in the labour force participation rate in the household survey. Regardless of the interpretation, the data does set the tone for US policy heading into the key Jackson Hole speech, but even if the US is registering economic outperformance, this is still not being reflected within currency markets as the euro continues to trade as a risk currency rather than a funding currency, and there are still plenty of outstanding issues needed to be resolved. In particular some additional positivity has been generated around headlines pertaining to EFSF obtaining credit facilities but we would be extremely cautious in interpreting the news as a good step forward. From a trading point of view, however, we still recognise 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 would maintain short-euro positions through various longer-term structures and are thus not as susceptible to shorter-term risk squeezes. Ahead today Fed Chairman Bernanke is giving a speech on “Economic Measurement”.
Click here to read the full report: UBS Morning Adviser Europe
UBS Investment Bank