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ab

Fixed Income & FX Research
FX - Strategy

UBS Investment Research
FX Morning Adviser

Global

If You Must Sell GBP
5 December 2013

The BoE decision on Thursday will probably be a non event as the BoE has
already played several ‘tightening’ cards over the past month with the quarterly
inflation report and FLS tweaks; better to focus on the Autumn Statement instead.
However, with sterling advancing on all fronts to multi-year highs and persistent
doubts over the economy’s ability to continue outperformance, some investors are
starting to look for exit strategies. We have some sympathy with this view, but
caution against a zero-sum approach. Sterling’s risk status has never been stable
and differentiation is necessary, which brings relative value into the picture.

www.ubs.com/fx

Firstly, we have to bear in mind that the biggest driver for FX next year is likely to
be the evolution of the Fed’s broader policy path. The market may be pricing in
tapering but the respective reaction functions of individual currencies remain in
flux. However, at this point no G10 currency is expected to actually make any
headway against the dollar if the Fed’s actions bring about a rise in long-end yields
(chart 1). Of course, JPY and CHF, the traditional funding currencies for dollar
‘carry trades’ will likely perform the worst, but NOK and GBP are next in line.
NOK has a perpetual liquidity problem, while sterling’s sensitivity is probably
attributable the BoE’s policy advances versus the Fed, and the consequences of any
unwinding. On the other end of the spectrum, CAD and EUR can be expected to
face limited headwinds even if the Fed does taper. As such, with tapering in the
background, all else being equally GBPCAD lower and EURGBP higher look to
be decent trades, though shorts versus AUD, NZD and SEK would also work.
Further differentiation can be obtained from central bank path divergence.
As forward guidance is being set two-years out, divergence between 2y OIS would
mark the best indicator for correcting mispriced policy differentials (Chart 2). Out
of the candidate currencies, the BoE enjoyed policy differential gains against all
bar the RBNZ. This immediately calls into question risk: reward in being short
GBPNZD, as the risks are clearly to the RBNZ being less dovish than how much
has been priced in. For EUR and SEK, GBP’s relative rate gains are modest, and as
we expect the ECB to follow the BoE in a tightening move by at least two quarters,
and the Riksbank will likely limit its divergence vs. the ECB, there is still greater
risk: reward in being long sterling versus EUR and SEK. The BoE has registered
the strongest OIS gains against the RBA and BoC, which already leaves sterling
exposed to the downside as the balance of risks to these two central banks are
either remaining neutral or shifting towards a tighter view. The AUD still has the
‘China reform beta’ to deal with, which may delay the RBA a while longer. In
contrast, we expect the BoC to hike in late 2014, a scenario currently not priced.
With GBPCAD now at 4-year highs, going the other way is looking attractive.
Chart 1: Sensitivity to Tapering ($-X gain on US 10y gain) Chart 2: Year-to-date changes in 2-year OIS spread
0.20

60

0.16

40

50
30
20
bp

0.12

-

0.08

(10)
(20)

0.04
0.00

10

vs. Fed
vs. ECB
vs. BoC
vs. RBA
vs. RBNZ
vs. Riks

(30)
(40)

$CAD $EUR $AUD $NZD $SEK DXY $GBP $NOK $CHF $JPY

Sources: UBS Calculations

This report has been prepared by UBS Limited

(50)
Jan-13

Mar-13

May-13

Jul-13

Sources: Bloomberg, UBS Calculations

Sep-13

Nov-13

FX Morning Adviser 5 December 2013

FX Technicals
EURUSD

NEUTRAL

There is a strong resistance at 1.3627. Only a close above this would be
positive, opening the way to the 1.3832. Support is at 1.3497 ahead of 1.3421.

USDJPY

BULLISH

As bullish conditions persist, there’s scope for further upside in the near-term to
test the resistance at 103.74 and then 105.75. Support is at 101.18.

GBPUSD

BULLISH

With the MACD above its zero line, any downside will be corrective and limited to
support at 1.6288. Resistance is at 1.6443, a break above which would open
1.6618.

USDCHF

NEUTRAL

The latest weakness suggests scope for extension of the weakness, with next
support at 0.8990 ahead of 0.8891. Resistance is at 0.9111.

AUDUSD

BEARISH

With the MACD below its zero line, there’s potential for more downside over the
coming days. There is no major support until 0.8848. Resistance is at 0.9168.

USDCAD

BULLISH

The pair extends its strength to post new highs. The next major resistance focus
is at 1.0804, a break above which would open 1.0853. Support is at 1.0616.

EURCHF

BEARISH

The bearish development on Wednesday was the close below the support at
1.2277. This indicates extension of the sell-off to critical support at 1.2215.
Resistance is at 1.2332.

EURGBP

BEARISH

While resistance holds at 0.8338, there’s scope for extension of the bearish trend
to break below support at 0.8253 and then onto test 0.8160.

EURJPY

BULLISH

There’s potential for more upside to extend its bullish pattern of higher
highs/lows and focus is on the critical resistance at 140.99. Support is at 138.31.

*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
Sweden
Sweden
Norway
UK
UK
UK
Euro Area
Euro Area
United States
Euro Area
Canada
United States
United States
United States
United States
United States
United States
Canada
United States
United States
UK
UK

GMT

23:50
23:50
23:50
23:50
00:30
08:30
08:30
09:00
11:15
12:00
12:00
12:45
12:45
13:15
13:30
13:30
13:30
13:30
13:30
13:30
13:30
13:30
15:00
15:00
17:15

Release/Event

Japan Buying Foreign Bonds (Nov-29)
Japan Buying Foreign Stocks (Nov-29)
Foreign Buying Japan Bonds (Nov-29)
Foreign Buying Japan Stocks (Nov-29)
Trade Balance (Oct)
Service Production sa (Oct)
Service Production wda (Oct)
Deposit Rates
Chancellor Osborne Speaks
BoE Bank Rate
BoE Asset Purchase Target (Dec)
ECB Announces Interest Rates
ECB Deposit Facility Rate
Fed's Lockhart Speaks
ECB's Draghi Speaks
Building Permits (Oct)
Initial Jobless Claims (Nov-30)
Continuing Claims (Nov-23)
GDP Annualized (Q3 S)
Personal Consumption (Q3 S)
GDP Price Index (Q3 S)
Core PCE (Q3 S)
Ivey PMI sa (Nov)
Factory Orders (Oct)
Fed's Fisher Speaks
Halifax House Prices (Nov)
Halifax House Price (Nov)

Frequency

UBS

Prev/Revised

Consensus

Actual

JPY bn
JPY bn
JPY bn
JPY bn
AUD mn
m-o-m
y-o-y
%

n/a
n/a
n/a
n/a
-600
n/a
n/a
1.50%

1405.6
-91.6
-209.3
707.5
-284
-0.40%
1.10%
1.50%

n/a
n/a
n/a
n/a
-350
0.50%
1.70%
1.50%

65.5
-66.4
57.6
368.7
-529

%
GBP bn
%
%

0.50%
375
0.25%
0.00%

0.50%
375
0.25%
0.00%

0.50%
375
0.25%
0.00%

m-o-m
lvl
lvl
q-o-q
m-o-m
q-o-q
q-o-q
index
m-o-m

n/a
n/a
n/a
3.10%
1.50%
n/a
n/a
n/a
-2.50%

1.70%
316K
2776K
2.80%
1.50%
1.90%
1.40%
62.8
1.70%

1.00%
321K
2800K
3.10%
1.50%
1.90%
1.40%
59.5
-1.00%

m-o-m
3mths/year

0.60%
7.20%

0.70%
6.90%

0.80%
7.30%

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

UBS 2


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