Cliff Hurts Risk Again
The FOMC minutes revealed that a number of participants at the October meeting thought more asset purchases would likely be needed after Operation Twist ends in December. This is the clearest indication yet that the pace of asset purchases under QE3 may accelerate as we cross into the new year. Indeed our US economists stick to their view that the Fed will expand QE3 on Dec 12tth so that it comprises of not only the current $40 bn worth of monthly MBS purchases, but also an additional $45 bn in monthly UST purchases. US stocks had yet another bad day, taking cumulative losses since the US Presidential election to over 5%. President Obama made clear his desire to allow Bush-era tax cuts to expire in January, and said that the US could succumb to the fiscal cliff due to what he called Republican political ‘stubbornness’. The Australian dollar could ignore the US equity weakness no longer, and finally slipped to 1.0359 lows. USDJPY climbed through 80.00 after Japan’s Prime Minister Noda announced his intention to dissolve parliament on Friday of this week. A lower house general election has now been penciled in for Dec. 16. The decision to hold the election is no major surprise – one had been expected either in December or January given Noda had earlier declared his intention to dissolve the house “soon”, and opposition parties seemed unwilling to support key legislation until Noda set a date for dissolution. We are now likely to see an escalation in yen-negative rhetoric from politicians eager to make additional BoJ-easing and currency-strength an election issue. In that respect, yen weakness over the past 24 hours is warranted to some degree. However we would be wary of taking our eyes off the bigger picture – US yields are depressed and are likely to remain so until clear signs of political compromise emerge on the US fiscal cliff issue, and this is likely to drag USDJPY lower again as year-end approaches. The prospect of accommodative Fed policy for longer should not be dismissed either.
Click here to read the full report: UBS Morning Adviser Asia
UBS Investment Bank