Yen Still Vulnerable
US Treasury yields nudged higher again overnight, giving USDJPY another upward push. Although yesterday’s headline CPI in the US was on the soft side of consensus, industrial production marginally beat expectations and the housing market index climbed to levels unseen since 2007. That was enough to persuade investors that the Fed is now less likely to embark on another round of asset purchases in September – especially when taken together with the recent nonfarm payrolls and retail sales reports (both of which showed considerable resilience). Dallas Fed President Fisher stuck to his hawkish stance and also warned that further stimulus measures now might be viewed as a “political” decision given the proximity of the upcoming US elections. Fisher said fiscal and regulatory uncertainty is inhibiting investment, but he does not see a “high likelihood” of a recession in 2013. All this supports the view of our US economists that further asset purchases are unlikely and that if the Fed does choose to act in September, a more likely approach would be the introduction of a targeted bank lending scheme delivered via the Fed’s discount window − where cheap credit would be made available in return for bank pledges to on-lend the cash to the real economy. The ECB, the Bank of Japan, and the Bank of England meanwhile are each likely to ease policy yet again over the months ahead, and this keeps us optimistic about the dollar’s prospects against the other majors into year end. Ahead today, a decline in jobless claims and stronger US housing data will likely be needed to keep USDJPY aloft, and our US economists are optimistic on both fronts. A soft Philly Fed report beckons however.
Click here to read the full report: UBS Morning Adviser Europe
UBS Investment Bank