Awaiting More US Data
Currency markets were mostly indecisive during the Asia session, although there was a very brief episode of dollar buying when Richmond Fed President Lacker explained why he dissented again at Tuesday’s FOMC. Lacker favours a rate hike in 2013. He has revealed this before, but this time the FX reaction was more apparent. We see this as a sign that Fed policymaking has overtaken Greece-related issues, and now occupies centre-stage in the minds of investors. As a result, the behaviour of US yields seems likely to become an increasingly important driver of FX markets. Oil continues to exert a secondary influence too. Newswires reported that discussions are underway to release crude from the strategic oil reserves of developed economies, but that no final decision has yet been taken. We note that the reserves were tapped last year in the wake of geopolitical tensions in Libya and 60 million barrels were released over a 30 day period. The price of crude fell sharply at the time, and we would not be surprised to see a similar reaction if the reserve is tapped again this time around. Falling oil prices would likely push EURUSD slightly lower by reducing inflationary pressures in the Eurozone. Meanwhile US data continues to improve. The downtrend in US jobless claims remains intact, with the latest reading for the week of March 10 dipping further to 351k (consensus 357k) – another four-year low. Our US economics team expects the unemployment rate to drop to 7 ¾% at the end of this year and 7 ¼% at the end of 2013. Elsewhere, EURCHF finds itself back below 1.21 in the wake of the SNB’s Monetary Policy Assessment, which affirmed the need to keep the minimum exchange rate target at 1.20. Price action in EURCHF post-decision suggested there were opportunistic EURCHF longs positioned for stronger language on the FX floor, only to be disappointed after the fact. Ahead today, the focus will be on the US CPI, industrial production and Michigan confidence numbers.
Click here to read the full report: UBS Morning Adviser Europe
UBS Investment Bank