Firm UK Retail Sales
The UK did its bit in alleviating growth fears overnight as retail sales also came in better than expected. However, the focus will inevitably on whether the US can continue its recent good run of form and pressure more short-term names to drop their Treasury holdings as the wider macro environment refuses to cooperate. While it is undeniable that macro event risk will pick up at some point, and most likely earlier than expected, at this point asset-starved yields seekers are waiting to pounce and we are starting to see the impact on FX markets as USDJPY continues to push higher. Although yesterday’s headline CPI in the US was on the soft side of consensus, industrial production marginally beat expectations and the housing market index climbed to levels unseen since 2007. That was enough to persuade investors that the Fed is now less likely to embark on another round of asset purchases in September – especially when taken together with the recent nonfarm payrolls and retail sales reports (both of which showed considerable resilience). Dallas Fed President Fisher stuck to his hawkish stance and also warned that further stimulus measures now might be viewed as a “political” decision given the proximity of the upcoming US elections. Fisher said fiscal and regulatory uncertainty is inhibiting investment, but he does not see a “high likelihood” of a recession in 2013. All this supports the view of our US economists that further asset purchases are unlikely and that if the Fed does choose to act in September, a more likely approach would be the introduction of a targeted bank lending scheme delivered via the Fed’s discount window where cheap credit would be made available in return for bank pledges to on-lend the cash to the real economy. Ahead today in the US, housing starts and permit numbers are both due, though the Philly Fed survey is likely to extend deeper into negative territory. We remain comfortable with our structural dollar bullish forecasts, though USDJPY moves need to be treated with caution as there have been plenty of false dawns in the past, and the imminent crowding of the event risk calendar has been well-flagged in advance. Overnight USDJPY traded 78.93-79.34, EURUSD 1.2256-1.2306.
Click here to read the full report: UBS Morning Adviser America
UBS Investment Bank