Payrolls Due
Risk remains in rude health as European markets rallied further on the back of a strong showing by Asian stocks. In addition to the positivity generated by the ECB’s new OMT, the perception that China is now also ready to do more to stimulate the economy has given risk an extra boost, and if payrolls (UBSe. 135k, cons. 130k) comes in strong, those on the sidelines may be forced to step-in with risk on flows. Nonetheless, these are still only tactical shifts and factoring in the elimination of tail risk, and it will only be a matter of time before structural issues need to be addressed – be it the Eurozone’s fundamentals, Chinese imbalances or the US labour market. For example, even though AUD has also consolidated overnight, our economics team has now downgraded its view on RBA and we now look for an additional 50bp in cuts as the economy continues to slow and adjust towards weaker capital expenditure trends in the mining sector – which in itself is a structural shift. As such, current price action will still be a function of positioning shifts, and the high-beta assets where investors have been most underweight stand to gain the most. There was also particular focus on the Swiss franc overnight, as EURCHF reached an 8-month high above 1.2150. The release of reserves numbers for July and August showed that pressure on the SNB has eased substantially, and judging by our own flow reports over the last few weeks, it is true that EURCHF selling which resemble capital flight/preservation flows at the expense of the Eurozone have tailed off significantly. Again, this is a positioning move, but if underlying data show that longer-term investors such as asset managers or private clients are not only ceasing their liquidation but also thinking about returning to the Eurozone, especially into areas which may benefit from the ECB’s decisions, it would mark a departure from previous perceptions. Otherwise trading was still relatively subdued ahead of payrolls. A strong release would also put further stimulus from the Fed on ice, and in the wake of the risk-positive market moves the past few days, odds of fresh stimulus in the upcoming meeting have probably eased significantly. EURUAD traded 1.2627 – 1.2700 and USDJPY 78.86-79.01.
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UBS Investment Bank