USD Still Climbing
The US yield curve was prodded into life by last night’s FOMC policy statement. US 2y yields climbed above 35 bp overnight and the 10y has finally hit 2.15%. This kept the yen in particular on the defensive, and the dollar also advanced more generally. USDJPY set an 11-month high trading between 82.68-83.32. Yesterday’s Fed and BoJ policy meetings suggest a gradual Fed-BoJ divergence should manifest itself over the months ahead and this should keep USDJPY risks skewed to the upside. Notably, the FOMC upgraded assessments of the US labour market plus capex, and no longer cited “slowing in global growth”. Perhaps more importantly, the FOMC now foresees “moderate economic growth” in the longer run, a step up from “modest” previously. Though the late 2014 rate guidance was reaffirmed, US dollar bulls could glean encouragement from the fact that there was no move toward any further QE. Our US economics team expects the Fed to stay on hold well into next year, before hiking rates in H2 2013. The BoJ is unlikely to be in such a position. Yesterday’s decision to leave the Asset Purchase Programme (APP) unchanged should not obscure the easing bias evident in the expansion and extension of the special lending facility for growth industries, not to mention the dissent from Board member Ryuzo Miyao, who proposed a JPY 5 trn boost to the APP. The policy spotlight now shifts to Norges Bank’s meeting later today. We expect no change in the headline policy rate, but anticipate significant verbal intervention by Governor Olsen on the strong currency. Overnight, EURUSD traded at 1.3031-1.3121. Finally, our latest fundamental trade recommendation advocates the purchase of a 2-month CADCHF call spread.
Click here to read the full report: UBS Morning Adviser Europe
UBS Investment Bank