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Fixed Income & FX Research
FX - Strategy

UBS Investment Research
FX Morning Adviser

Global

Shifting the Guidance Burden
The Fed has spoken – taper and begin advancing the policy debate away from QE.
Although the move was a surprise, the FOMC will likely reflect positively on the
effectiveness of their guidance in maintaining general stability in sentiment. In
hindsight, the strengthened interest guidance was far more important as an anchor.
The median year-end Fed Funds Target Rates (FFTR) projections for 2015 and
2016 respectively fell, and the FOMC has also warned that the FFTR would remain
at current levels well past 6.5% in unemployment is breached. The added emphasis
suggests leaving the zero bound will almost be fully discretionary.

19 December 2013

Accordingly, all asset reaction functions will now gradually move away from crude
quantitative barometers and begin to look at FFTR pricing at various maturities.
We would make a very clear distinction here between the Fed’s forecast horizon
and also longer-term pricing, which will have a greater bearing on the Treasury
curve – also a key FX driver. Firstly, looking at the impact of interest rate pricing
out to three-years, the performance beta for G10 currencies versus the dollar
gradually loses sensitivity along the term structure (Chart 1). The 1-year is the
immediate driver, despite virtually zero chance of interest rate movements in the
US in 2014. This suggests that policy volatility and relevant guidance within other
central banks is far more important for exchange rates: USDSEK and USDNOK
register the best performance, which is no surprise in the wake of both Norges and
Riksbank’s significant extension of low-rate guidance in their most recent policy
meetings. On a three-year horizon, sensitivities begin to change and USDJPY
sticks out significantly, underscoring markets’ belief that significant BoJ stimulus
will be needed well beyond their current QQE guidance if 2% inflation is to be
achieved in Japan; but in 2016 almost all other central banks would be expected to
have begun hikes, thereby limiting policy differentials in the dollar’s favour.
The Fed’s December projections show that the Fed was also very close to nudging
lower the median longer-term FFTR projection. This is significant for longer-term
investors, as a lower trend FFTR would imply lower potential output. The Fed does
not wish to send this message and in part the added ‘discretion’ over the
unemployment threshold gives them enough flexibility to condition the relevant
expectations. However, as long-term FFTR expectations will anchor the Treasury
curve and play an even stronger role in driving cross-border flows (note higher
beta levels in Chart 2), FX markets must be attentive to the relevant trades. Here,
the Nordics fall down the pecking order, while USDJPY and USDCHF remain the
most sensitive. Over the coming quarters, commensurate to unemployment
declines, the burden of ‘guidance’ will shift towards long-term FFTR expectations.
After several years of slumber, perhaps the OIS market is ready to lead FX again.
Chart 1: G10 performance beta to short-rates (daily, ytd) Chart 2: G10 performance beta to long-rates (daily, ytd)
0.20

0.08
0.07
0.06
0.05
0.04

1y OIS
2y OIS
3y OIS

0.12

10 TSY
20Y OIS

0.08

0.03
0.02

0.04

0.01
0.00

0.16

0.00
$GBP $EUR DXY $CHF $CAD $AUD $NZD $JPY $SEK $NOK

Sources: Bloomberg, UBS FX Strategy

This report has been prepared by UBS Limited

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

Sources: Bloomberg, UBS FX Strategy

www.ubs.com/fx

FX Morning Adviser 19 December 2013

FX Technicals
EURUSD

BULLISH

Fresh selling materialised on Wednesday bringing our focus on the support at
1.3614, a break below which would prolong the correction to 1.3493. Strong
resistance is at 1.3833.

USDJPY

BULLISH

With new highs posted, there’s further upside potential to test the critical
resistance at 105.75. Support is at 102.50.

GBPUSD

BULLISH

Our focus is on the momentum tools which are threatening to cross higher within
a bullish trend. Such a development would indicate potential break above
resistance at 1.6484 and then onto 1.6622. Support is at 1.6220.

USDCHF

BEARISH

The recent recovery does not yet change the bearish picture as long as
resistance holds at 0.8992. The risk is for resumption of downtrend from here to
break below support at 0.8833, exposing 0.8568.

AUDUSD

BEARISH

The pair extended its bearish pattern of lower highs/lows, opening the doors to
support at 0.8771 ahead of 0.8545. Resistance is at 0.8970.

USDCAD

BULLISH

The pair resumed its bullish trend and the resistance range focus is at 1.0807
and 1.0853. Support is at 1.0602.

EURCHF

BEARISH

Any further recovery will be limited to resistance at 1.2281. Support is at 1.2167
ahead of 1.2130.

EURGBP

NEUTRAL

The sharp sell-off on Wednesday brings our focus on the MACD which is
threatening to cross below its zero line. Such a development would be negative,
opening the way to 0.8253. Resistance is at 0.8403.

EURJPY

BULLISH

The bullish development on Wednesday was the close above resistance at
142.63, suggesting further upside potential in the near-term to test psychological
150.00 level. Support is at 140.98.

*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
New Zealand
Japan
Japan
Japan
Japan
Switzerland
Euro Area
UK
UK
United States
United States
United States
Switzerland
United States
United States
United States
United States

GMT

23:50
23:50
23:50
23:50
01:00
04:30
05:00
05:00
05:30
07:00
09:00
09:30
09:30
13:30
13:30
13:30
14:00
15:00
15:00
15:00
15:00

Release/Event

Japan Buying Foreign Bonds (Dec-13)
Japan Buying Foreign Stocks (Dec-13)
Foreign Buying Japan Bonds (Dec-13)
Foreign Buying Japan Stocks (Dec-13)
Trade Balance (Nov)
All Industry Activity Index (Oct)
Leading Index CI (Oct F)
Coincident Index (Oct F)
Nationwide Dept Sales (Nov)
Trade Balance (Nov)
ECB Current Account sa (Oct)
Retail Sales Ex Auto (Nov)
Retail Sales Ex Auto (Nov)
Initial Jobless Claims (Dec-14)
Continuing Claims (Dec-7)
Fed's Fisher Speaks
SNB Quarterly Bulletin
Existing Home Sales (Nov)
Existing Home Sales (Nov)
Philadelphia Fed Business Outlook (Dec)
Leading Index (Nov)

Frequency

UBS

Prev/Revised

Consensus

Actual

JPY bn
JPY bn
JPY bn
JPY bn
NZD mn
m-o-m
index
index
y-o-y
CHF bn
EUR bn
m-o-m
y-o-y
lvl
lvl

n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
325K
n/a

390.1
-127.5
-12.4
114
-173
0.50%
109.9
109.6
-0.60%
2.43
13.7
-0.60%
2.30%
368K
2791K

n/a
n/a
n/a
n/a
n/a
-0.30%
n/a
n/a
n/a
2.8
n/a
0.30%
2.40%
335K
2775K

110.5
-213
425.5
619.3
183
-0.20%

units mn
m-o-m

4.95
-3.30%
10.0
0.80%

5.12
-3.20%
6.5
0.20%

5.02
-2.00%
10.0
0.70%

index

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

UBS 2


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