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ab

Fixed Income & FX Research
FX - Strategy

UBS Investment Research
FX Morning Adviser

Global

There’s a USD in EURUSD
8 November 2013

Ex-post, the ECB clearly ‘delivered’. EURUSD ended European trading on
Thursday materially lower than levels after the CPI reading last week. In addition,
the noticeable step closer to a potential deposit rate cut (for details please see FX
Comment: ECB – A bias to negative deposit rates, Nov 7th) will likely serve as a
strong deterrent against EUR longs in the short term. Our FX Flow Monitor
indicates that the burden of adjustment on EURUSD long-liquidation will likely
fall on asset managers, but like other investors they will need to decide if the ECB
or European developments in general are enough to keep the position on. After all,
there is a ‘USD’ in EURUSD, and markets should bear in mind the Fed/US
tailwinds to this trade as we head into the payroll print (UBSe. 100k, cons. 120k).

www.ubs.com/fx

Firstly, as our economists have highlighted, with Thursday’s refinancing rate cut
the ECB has now exhausted its conventional policy toolkit. Nonetheless this does
not undermine exchange rates’ ability to react in a conventional manner. At the
zero bound though, every last basis point matters, and this has allowed EURUSD
to trade in a +20 big figure range this year even though the corresponding range for
the 3m OIS spread was barely into double-digits. If for the time being the market
will sit on the ECB’s next ‘rate’ step, then the onus is on the Fed to start delivering,
but that can only happen if data cooperate. As we highlighted earlier this week (see
FX Morning Adviser: Data Turn Afoot, Nov 6th), there is strong potential for the
US to register a run of upside surprises in data, which could put an ‘earlier’
tapering back on the agenda. Front-end rates will probably react less than
Treasurys due to zero-bound limitations, and the Fed may still try to offset any
‘tightening’ in financial conditions by tinkering with thresholds. Nontheless, a
handful of basis points would be enough to tip the balance. As our broader dollarrally call for 2014 is largely predicated upon US policy, this is where the burden of
adjustment for EURUSD should lie, rather than ECB, and corresponding positions
should still be designed to react to US data rather than Eurozone policy event risk.
Balance sheet dynamics also hurt the cause of shorts. The ‘debasement’ debate is
somewhat stale but the ECB cannot ignore accelerating shrinkage relative to the
Fed. That EURUSD has not traded even higher is a credit to the ECB’s forward
guidance. Nonetheless, markets have acknowledged now that there will be no
mechanism for non-asset maturity driven Fed balance sheet unwinding, so here the
burden is back with the ECB, and today’s extensions of OMOs and terms is
designed not to tip the balance further in favour of the EUR in this race. Even so,
the effects could be mitigated in the dollar’s favour through short-end rate
adjustments, subject to Fed tolerance levels. EURUSD is far from a one-way bet,
but downside would look more attainable if new US-based drivers enter the fray.
Chart 1: If ECB is exhausted then Fed needs to deliver

Chart 2: Balance sheet still overshooting
8

165.00

EURUSD

6

155.00

3m OIS Spread

4

145.00

2

135.00

1.34

0

125.00

1.32

-2 115.00

1.40
1.38
1.36

EURUSD (RHS)

1.5
1.45
1.4
1.35

-4 105.00

1.30
1.28
1.26
Jan-13

1.55
Fed to ECB Balance Sheet Ratio (Jan 2009 = 100)

Apr-13

Jun-13

Sep-13

Sources: Bloomberg, UBS Calculations

This report has been prepared by UBS Limited

-6

95.00

-8

85.00

-10 75.00
Jan-09

1.3
1.25
1.2
Oct-09

Aug-10

May-11

Sources: Bloomberg, UBS Calculations

Mar-12

Dec-12

Oct-13

FX Morning Adviser 8 November 2013

FX Technicals
EURUSD

NEUTRAL

The recent weakness found support at 1.3293 and this level prompted a mini
rebound last night. Any further recovery will see resistance at 1.3501.

USDJPY

NEUTRAL

Initial resistance is at 99.41, a break above which would open 100.61. Support is
at 96.94 ahead of 95.81.

GBPUSD

BULLISH

The pair has bounced this week from the critical support at 1.5894, reinforcing
the bullish picture. Resistance is at 1.6122 ahead of 1.6260.

USDCHF

NEUTRAL

Critical resistance is at 0.9253. A break through this would open 0.9365. Support
is at 0.9113 ahead of 0.9028.

AUDUSD

NEUTRAL

Strong support is at 0.9410. A close below this will be negative, exposing 0.9281.
Resistance is at 0.9550 ahead of 0.9630.

USDCAD

BULLISH

With the MACD above its zero line, this is a bullish condition; there’s scope for a
break above 1.0497, extending the strength to the critical resistance at 1.0568.
Support is at 1.0384 ahead of 1.0357.

EURCHF

NEUTRAL

Resistance is at 1.2338 ahead of 1. 2376. Support is at 1.2277 ahead of 1.2215.

EURGBP

BEARISH

Further selling pressure on Thursday saw the weakness stall just ahead of the
support at 0.8285, a breach of which would expose 0.8160. Resistance is at
0.8409.

EURJPY

BULLISH

The latest weakness does not change the bullish picture as long as support
holds at 131.15. There’s potential for resumption of strength to resistance at
133.73 ahead of 135.51.

*NOTE: The trend for each currency pair as defined in the table is determined by our proprietary model and is independent of our discretionary interpretation
of price action
Source: UBS FX Strategy

Key Events
Country

Japan
Japan
Japan
Japan
Australia
China
Switzerland
Germany
Sweden
Germany
Norway
Switzerland
Sweden
Sweden
Sweden
Sweden
Switzerland
UK
UK
UK
Canada
Canada
Canada
Canada
United States
United States
United States
United States

GMT

23:50
23:50
23:50
23:50
00:30
02:37
06:45
07:00
07:00
08:00
08:10
08:15
08:30
08:30
08:30
08:30
09:00
09:30
09:30
09:30
13:15
13:30
13:30
13:30
13:30
13:30
13:30
13:30

Release/Event

Japan Buying Foreign Bonds (Nov-1)
Japan Buying Foreign Stocks (Nov-1)
Foreign Buying Japan Bonds (Nov-1)
Foreign Buying Japan Stocks (Nov-1)
RBA Statement on Monetary Policy
Trade Balance (Oct)
Unemployment Rate sa (Oct)
Trade Balance (Sep)
PES Unemployment Rate (Oct)
ECB's Asmussen Speaks
Norges Bank's Olsen Speaks
Retail Sales Real (Sep)
Industrial Production (Sep)
Industrial Prod. nsa (Sep)
Industrial Orders (Sep)
Industrial Orders nsa (Sep)
SNB's Jordan Speaks
Construction Output sa (Sep)
Visible Trade Balance (Sep)
Trade Balance (Sep)
Housing Starts (Oct)
Unemployment Rate (Oct)
Net Change in Employment (Oct)
Participation Rate (Oct)
Change in Nonfarm Payrolls (Oct)
Change in Private Payrolls (Oct)
Change in Manufact. Payrolls (Oct)
Unemployment Rate (Oct)

Frequency

UBS

Prev/Revised

Consensus

Actual

JPY bn
JPY bn
JPY bn
JPY bn

n/a
n/a
n/a
n/a

1031.1
-252.3
122.6
-7.9

n/a
n/a
n/a
n/a

276.6
-35.7
284.3
247.9

USD bn
%
EUR bn
%

26.20
3.20%
12.8
4.50%

15.21
3.20%
13.1
4.60%

24.80
3.20%
15.4
4.50%

31.10

y-o-y
m-o-m
y-o-y
m-o-m
y-o-y

n/a
1.20%
0.10%
1.80%
2.10%

2.40%
-2.30%
-6.90%
-0.20%
-1.20%

2.70%
1.30%
-0.10%
n/a
n/a

y-o-y
GBP mn
GBP mn
lvl
%
lvl
m-o-m
lvl
lvl
lvl
%

n/a
-9500
-3200
n/a
n/a
n/a
n/a
100K
120K
n/a
7.60%

4.00%
-9625
-3320
193.6K
6.90%
11.9K
66.4
148K
126K
2K
7.20%

8.20%
-9200
-2700
190.8K
7.00%
11.0K
66.4
120K
125K
5K
7.30%
UBS 2

FX Morning Adviser 8 November 2013

United States
United States
United States
United States
United States
United States
United States
United States
Euro Area
United States
Switzerland
United States
United States
United States
Germany
Germany

13:30
13:30
13:30
13:30
13:30
13:30
13:30
13:30
14:00
14:55
15:15
17:00
20:30
21:00

Average Hourly Earnings (Oct)
m-o-m
Average Hourly Earnings (Oct)
y-o-y
Personal Income (Sep)
m-o-m
Personal Spending (Sep)
m-o-m
PCE Deflator (Sep)
m-o-m
PCE Deflator (Sep)
y-o-y
PCE Core (Sep)
m-o-m
PCE Core (Sep)
y-o-y
ECB's Mersch Speaks
Univ. of Michigan Confidence (Nov P)
index
SNB's Danthine Speaks
Fed's Lockhart Speaks
Fed's Bernanke, Fisher and Summers to Speak
Fed's Williams Speaks
WPI (Oct)
m-o-m
WPI (Oct)
y-o-y

0.10%
n/a
0.30%
0.40%
0.10%
0.90%
0.10%
1.20%

0.10%
2.10%
0.40%
0.30%
0.10%
1.20%
0.20%
1.20%

0.20%
2.30%
0.30%
0.20%
0.10%
1.00%
0.10%
1.30%

73.5

73.2

74.5

0.50%
n/a

0.70%
-2.20%

n/a
n/a

Source: UBS Global Economics, Bloomberg LP, Reuters LP, Reuters, Market News International

UBS 3


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