Up Next – ECB, BoE And Riksbank
The BoC kept its policy rate unchanged at 1.0% as expected. It also continued its hawkish bias noting “some modest withdrawal of the monetary stimulus may become appropriate” if the economic expansion continues. After an ephemeral reaction lower, USDCAD rallied to break through the 0.99 level. Bloomberg reported two central bank officials briefing on the ECB’s bond-buying program. According to the officials, the ECB will undertake an unlimited and sterilized buying of sovereign debt with maturities of up to three years, but would refrain from setting yield caps. They also noted that the ECB will not have a seniority status on the bonds it buys and it could halt the program if a member state fails to adhere to the pre-conditions. The announcements are not official, but that hardly mattered as EUR rallied across the board with EURUSD breaking the 1.26 level during New York hours. German CDU lawmaker Barthle reported that Merkel accepts a temporary ECB program for short maturity bonds but stays opposed to “unlimited” bond-buying. The spreads on peripheral bonds narrowed further – Spanish 10y yields contracted by 16bp while German 10y yields rose by 8bp. As noted in our latest FX Comment (“Trading Draghi”), the ECB meeting ahead today might initially be viewed as a disappointment, since it may be slightly early for the presentation of the finer details and modalities of the bond buying programme. This is particularly the case if the ECB cuts the refi rate by 25bps, as UBS expects. However, any disappointment is unlikely to last for long, as the market realises that bond intervention is just a question of time and we think that there is potential for a short-term EUR rally. The BoE and the Riksbank also have their monetary policy meetings ahead today. The BoE is likely to keep its policy rate and asset purchase target unchanged at 0.5% and GBP375 bn respectively. Last month, Governor King noted that further monetary stimulus is more likely to be in the form of additional QE, rather than a rate cut. We expect the BoE to stay on the sidelines until November, when it gets a chance to assess the impact of Funding for Lending Scheme and the current QE programme. Our economists expect the Riksbank to keep its rate unchanged at 1.5%. But given the soft data in recent weeks and a currency that has appreciated considerably, risks are increasing that the Riksbank strikes a more dovish stance – to the detriment of SEK. Also on tap today is the employment report in Australia.
Click here to read the full report: UBS Morning Adviser Asia
UBS Investment Bank