Normal Service To Resume
Normal trading conditions are expected to resume on Wednesday as markets based the US are set to re-open. Whether activity in FX can pick up accordingly is a separate issue as the market continues to witness a distinct lack of event risk. Even in Greece, where political instability had threatened to derail the troika review process, the government now appears to be on the verge of reaching agreements on reforms, as the majority deputies of PASOK have signaled their intent to back reforms. Opposition from the smaller junior coalition partner, the Democratic Left, remains strong but it looks increasingly likely that the Eurozone can finally end a year on a stable note. Elsewhere, the market was also somewhat disappointed by the BoJ’s decision to expand the asset purchase programme by JPY11tln. This was only marginally above the JPY10tln expected and the pace of purchases was also slower than anticipated. Heading into year-end, obvious catalysts for USDJPY upside based on Japanese fundamentals appear limited and we continue to look for changes at the top of the BoJ next year for substantial changes to policy. Strong US numbers, starting with payrolls on Friday could also change the dynamics of the trade but expectations at present remain subdued. The BoJ’s launch of a lending scheme, however, underscores how global central banks are now seeking to move into policy innovation by targeting credit multipliers directly, rather than see proceeds of asset purchases being added to excess reserve accounts. The phrase ‘transmission mechanism’ is now a staple of policy discourse, though there is no one-size-fits all approach. Banking deleveraging led to credit misallocation from the BoE’s perspective, while the bank-sovereign link for the Eurozone periphery prompted the OMT to be launched. The Fed may choose to join their ranks at some point in the coming policy cycle, and markets will need to come up with new reaction functions. Ahead on Wednesday, Norway will decide on policy rates, while the Chicago PMI is out in the US. EURUSD traded 1.2886-1.2984 and USDJPY 79.28-80.14.
Click here to read the full report: UBS Morning Adviser Asia
UBS Investment Bank