Quiet Trading Pre-US Data
Risk appetite continued to hold during the European session though there was a general sense of calm ahead of inflation figures due later in the US. We are looking for headline inflation to edge back up to 3% (cons. 2.90%) but the US Treasury market appears to be of greater concern or encouragement, depending on your point of view on what is actually behind the current moves. With more talk of rebounding growth in the US and better conditions in the Eurozone, policymakers remain in a conundrum as to how to respond, taking into account the dissonance between the market’s outlook and their economic projections. Nonetheless, we still believe that upside in risk will be reflected in the short term not only amongst market’s data expectations but also asset prices. We have adjusted our growth forecasts accordingly for Europe and also Treasury yields – which should now end the year at 2.7% (from 2.4%). The latter point bodes well for the dollar but the switch into growth currency will be a gradual process and not without risk. Price-push inflation is still a great concern for policymakers and dismissing them as ‘transitory’ on a sustained basis lacks credibility. The moves in oil prices yesterday again underscores the fragility of risk sensitivities and even a slowpaced climb may come back to haunt growth at some point and induce the Fed to move back into stimulus mode. In addition, with growth expectations generally higher, scope for more surprises to the upside will be limited and deprive risk assets a source of momentum. The next phase of the current moves will be dependent on further allocations of structural underweighting in risk by asset managers, but this investor community is more than attuned to the structural risks out there and we would voice a cautious approach to riding FX gains off these flows. Later today apart from CPI, industrial production and the University of Michigan confidence index will be released. Overnight EURUSD traded in a range of 1.3050 – 1.3100 and USDJPY was firm at 83.29-83.83.
Click here to read the full report: UBS Morning Adviser America
UBS Investment Bank