UK Outlook Downgraded
US dollar bulls remain on the front foot, still underpinned by the post-FOMC rise in UST yields. A number of other factors have entered the equation as well. Our cautious view on Cable has been reinforced by the downward revision in the UK’s sovereign ratings outlook to negative from stable by Fitch, which warned of “the very limited fiscal space to absorb further adverse economic shocks in light of such elevated debt levels and a potentially weaker-than-currently forecast economic recovery”. NOKSEK has been undermined by the surprise 25bp rate cut by Norges Bank, which noted that the policy rate will remain in a 1%-2% range until June 20 and a “substantially stronger krone may also result in further interest rate cuts”. Then there is the Swiss franc, with EURCHF holding above 1.21 after its sudden jump overnight. We suspect the less dovish FOMC statement boosted USDCHF, which then triggered the EURCHF move just ahead of the SNB’s quarterly Monetary Policy Assessment later today. While the SNB may upgrade its growth prognosis alongside a downward revision to the short-term inflation outlook, our baseline scenario assumes the 1.20 floor will remain in place for the next 6 months or so at least. Apart from our long CADCHF recommendation via a call spread, we also think it makes sense to play Swiss franc weakness against the US dollar as well. As for USDJPY, there have certainly been no signs of any major repatriation flows in the run-up to the March 31 book closing in Japan; indeed, the Japanese have been net foreign bond buyers in 8 of the 9 weeks through March 2. The rise in the Nikkei beyond 10k is unlikely to significantly reduce the sensitivity of the Japanese authorities to the yen, especially in the light of the soggy sentiment readings for large manufacturers observed in yesterday’s Business Outlook Survey. With risks still tilted towards a widening of the 2yr UST-JGB yield spread, we see further upside towards our three-month USDJPY target of 85. Over the past 24 hours, USDJPY has traded between 82.87-83.83, with EURUSD at 1.3011-1.3090.
Click here to read the full report: UBS Morning Adviser Asia
UBS Investment Bank