Risk Appetite Softens
USD and JPY gained across the board as investor risk appetite remained subdued overnight. A weak German IFO report triggered a selloff in EUR crosses, especially EURJPY and EURUSD, that continued in the New York session. German IFO business climate index fell to 101.4 in September (prior: 102.3), the lowest reading in 2.5 years. The current assessment and expectations indices also trailed consensus printing 110.3 (consensus: 111.0) and 93.2 (consensus: 95.0) respectively. An IFO economist noted that 50% of the responses came before the constitutional court ruling on September 12, but that did not help contain the negative sentiment, on a day of limited data releases, as EURUSD lost about 50 pips during New York hours. Spanish yields, however, dropped across the curve, with 2y yields shedding about 10bp. US Treasury yields also dropped on Monday which pushed USDJPY below the 78 level. San Francisco Fed President Williams echoed the comments made by his fellow FOMC members last week, when he noted that QE3 is a “big shot in the arm” for the economy and the Fed will push QE3 till the employment situation improves. Williams added that the Fed will weigh its options again in December to decide if more easing is required. Our economics team expects that the Fed will replace the Twist programme at the year-end with an additional USD45 bn of outright purchases of US Treasuries. Ahead today, the RBA releases its report on ‘Financial Stability’ which will probably offer further insights into the strength of the Australian economy and its ability to sustain the rally in AUD in recent weeks. Elsewhere, ECB President Draghi, SNB President Jordan and US Treasury Secretary Geithner will be on wires today. Also on tap are the July retail sales report in Canada, July S&P/Case Shiller home price index and September consumer confidence index in the US.
Click here to read the full report: UBS Morning Adviser Asia
UBS Investment Bank