A Week Of Policy Decisions
Markets were broadly range-bound overnight with a great deal of focus on China’s launch of economic targets for the year ahead. The GDP target was set at 7.5% – the lowest since 2004 but this move had been well flagged in advance and we remain confident above-8.0% growth can be achieved. Comments on boosting resource imports should underpin the likes of AUD in the short term. Otherwise, markets should remain calm as last week’s LTRO continues to be absorbed. Libor fixing fell sharply for the Eurozone and further sizeable declines seem very likely over the coming days and weeks − making the euro look increasingly attractive as a funding currency and supporting our 3m EURUSD forecast of 1.25. As widely expected, Friday’s EU summit broke up without agreement on whether to expand the size of the EFSF/ESM. EU Council President von Rompuy said a decision on this would be taken in March, but did not offer a concrete date. We think there is little chance of progress before the end of March, especially if Eurozone bond markets continue to heal thereby removing the sense of urgency. Nonetheless there is still a need to guard against complacency – press reports out of Germany are already talking about a 3rd bailout for Greece and developments in Spain may lead to suggestions the fiscal compact is already being weakened. It is a busy week for monetary policy with the RBA, BoE, ECB, and RBNZ all due to meet, while Norges bank, the SNB and the FOMC convene the week after. St. Louis Fed President Bullard steered a middle course in weekend remarks on the stance of Fed monetary policy. Again, he noted the risk of a ‘really seriously meltdown’ in Europe has subsided for now but he still wants to keep the Fed’s options open regarding the possibility of more QE. Meanwhile Dow Jones/Wall Street Journal reported the FOMC is ‘unlikely to take any new actions’ at next week’s meeting, although ‘a slightly more upbeat’ assessment of the economy may emerge. A future round of QE has still not been ruled out according to the report. On Friday, EURUSD traded 1.3184-1.3213 and USDJPY 81.22-81.86.
Click here to read the full report: UBS Morning Adviser Europe
UBS Investment Bank