Dollar Dejected
The dollar continued to trade on a soft note overnight in Europe across the board. Risk assets were generally bid, all major equity markets pushed higher, following Asian equities while commodities and precious metals continued their rally. The market forces are clearly quite strong at this juncture and we would caution against immediately fading the moves, though we do see scope for some stabilization , given the dollar has already sold-off quite sharply since the August payrolls report. JPY weakness was the standout theme in Europe, with EURJPY rallying one big-figure, dragging USDJPY up with it. The pair remains supported both by the threat of intervention and policy response and the Fed’s decision to avoid buying US Treasury securities. Last night the Fed announced another round of asset purchases, targeted exclusively at the agency MBS market. The fed funds rate guidance was also extended to mid-2015 and Operation Twist will continue as before. Although MBS purchases will be conducted at the moderate pace of $40 bn per month, the program is openended and so has the potential to become very large. The intention is to persist until the outlook for the labour market “improves”. Consequently, the dollar’s sensitivity to employment-related data releases is likely to increase significantly in future. Fed members revised their growth and inflation outlook upward in 2013, after factoring in the effects of this latest stimulus. Forecasts for unemployment rate, however, remained hardly changed at 7.6% to 7.9%. Attention will soon turn to how the Bank of Japan may respond. Overt pressure is already being applied for further monetary easing. Economy Minister Furukawa said that Japanese monetary policy must take into account the impact of overseas developments such as FOMC decisions. In this environment, it is reasonable to assume that a further extension to the BoJ’s APP is likely at Wednesday’s policy decision. Sweden revised its Q2 GDP down to +0.7% q/q vs the flash estimate of +1.4%. This reflects the softer data of late, but is still a weak print overall and provides some justification for the Riksbank’s cut last week. Ahead today, markets will likely pay attention to the Eurogroup meeting in Cyprus, although we do not expect any major developments to flow from it.
Click here to read the full report: UBS Morning Adviser America
UBS Investment Bank