Soft China CPI
The Australian dollar (and risk appetite more broadly) found support after China’s CPI for October came in softer than expected at 1.7% y/y (cons. 1.9%). The market read it as providing room for future monetary stimulus, although we do not expect any policy initiatives to flow from this. Elsewhere, USDJPY recovered a little having dropped to a low of 79.32 during the US session after worries about the impending US fiscal cliff intensified. There was no shortage of media commentary on the subject which kept the issue front-and-centre in investors’ minds. Adding to existing concerns, the US Congressional Budget Office forecast that if the cliff happens as planned, a US recession would ensue and the unemployment rate would hit 9.1% by end-2013. S&P waded into the debate saying it sees an increasing chance (up to 15%) that political brinkmanship will push the US over the cliff. That fits with our view that a political compromise is still the most likely outcome, even if we have to wait until the eleventh hour for politicians to find common ground. The problem is that a lot of damage could be done to risk appetite in the meantime – a fact to which yesterday’s price action can testify. UST 10y yields fell sharply particularly in the wake of the Treasury auction, and US equities had another bad day with the S&P500 dropping 1.2%. Bank of Canada Governor Carney still believes the US fiscal cliff can be averted in time, but even he is preparing for the worst. He said the Bank could react rapidly if the US slips into recession, implying that Canadian rate cuts would be a possibility. Elsewhere, Cable got a 50 pip boost after the Bank of England opted not to extend its Gilt buying program, which is now on hold. The ECB made no adjustment to its policy settings, and ECB President Draghi’s press conference was a non-event.
Click here to read the full report: UBS Morning Adviser Europe
UBS Investment Bank