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

Global Research

6 January 2014

FX Morning Adviser

FX

Worrying Good News for EUR?

Global

Better funding conditions but for the wrong reasons?
Although the euro failed to start 2014 on a strong note, it was a different story for
periphery bonds. As of the European close on Friday January 3rd, the spread between
the 10-year papers of Spain and Italy over Germany had both narrowed to below
200bp, i.e. their ‘sovereign risk premiums’ are now back down to 2010 levels. Given
the tightening has been accompanied by general euro resilience, it is a strong indication
that external investors are returning to the market in search of carry. Current trends do
not help downside EURUSD views, barring perhaps a 'hawkish' Fed shock. Nonetheless,
even while the structural underpinnings of the 'improvement' may prove sustainable,
whether they are acceptable – to the ECB and governments alike – is another matter.
Firstly, the current spread-euro virtual cycle (Figure 1) itself will start to challenge the
ECB’s current outlook. Stronger external demand (i.e. the return of the marginal buyer)
for periphery debt may allow governments to ease the demand destruction introduced
by austerity. However, upside price momentum could be easily offset by stronger passthrough effects in the wake of the EUR’s decent year-end run. As the broader
improvement in the Eurozone’s balance of payments is continuing regardless, the
Eurozone might be looking at a ‘twin surpluses’ situation, which in most cases is not a
welcome development. The capital flow ‘rebalancing’ the Eurozone requires is more
internal in nature which discounts pass through, yet a broader push on this front
remains politically contentious. Secondly, a reduction in sovereign premium in part
indicates a reduction in banking risk premium – helped by Spain’s exit of the bank
bailout programme. Credibility issues aside, it is hard to escape the fact that much of
the ‘clean-up’ is attributable to deleveraging: MFI lending in the Eurozone to nonfinancial corporations continues to collapse (even before the AQR snapshot, Figure 2),
but the direct and indirect transmission is certainly into marginally better balance
sheets, boosting sovereign bond performance accordingly.

Figure 1: EUR strength and spread compression

700

Figure 2: Improvement due to or despite deleveraging?

0.85

600

0.80

500
bp

400

0.75

200

0.70

300
GE-ES 10y Spread
GE-IT 10y Spread
USDEUR (RHS)

100
0
Jan-10

Oct-10

Aug-11

May-12

Mar-13

0.65
Dec-13

Source: Bloomberg, UBS Calculations

600

2.00

500

1.00

400

0.00

300

-1.00

200

-2.00
GE-ES 10y Spread
GE-IT 10y Spread
MFI loans to Non-Financials

100
0
Jan-10

Nov-10

Source: Bloomberg, UBS Calculations

To sum up, 'good news' for the euro and sovereign spreads still comes at a heavy cost
to growth. Stronger export demand and gentler austerity will struggle to counter the
structural internal devaluation in select countries. The ECB is always ready to act, but a
mainstream political consensus favouring growth and 'healthy' rebalancing is elusive,
and looks to remain so as the European elections – where populism thrives – approach.

www.ubs.com/fx

This report has been prepared by UBS Securities Pte. Ltd. (Reg.

Aug-11

May-12

Feb-13

-3.00
-4.00
Dec-13

Technical FX
EURUSD

NEUTRAL

Focus is on support at 1.3524, a break below this level would be a bearish
development as it would confirm MACD’s settlement below its zero line.
Resistance is at 1.3673.

USDJPY

BULLISH

The pair has been consolidating below the critical resistance at 105.75.
Any further downside will be limited. Support is at 103.98 ahead of
103.09.

GBPUSD

BULLISH

Having posted new highs last week, the pair has seen a setback which
should be limited to support at 1.6317. Resistance is at 1.6474 ahead of
1.6622.

USDCHF

NEUTRAL

The pair extended its recovery and is approaching resistance at 0.9078. A
close above which would trigger further upside to 0.9197. Support is at
0.8989 ahead of 0.8908.

AUDUSD

BEARISH

While resistance holds at 0.9035, the pair remains vulnerable to break
through 0.8821 and extend the bearish trend to 0.8545.

USDCAD

BULLISH

The pair has been consolidating within a broader bullish trend and
downside should find support at 1.0582. Resistance is at 1.0678 ahead of
1.0738.

EURCHF

NEUTRAL

There is a strong trendline resistance at 1.2324. A break through which
would open 1.2352. Support is at 1.2262 ahead of 1.2226.

EURGBP

BEARISH

With the MACD firmly below its zero line, there’s potential for extension
of the bearish trend. Support is at 0.8253, a break below which would
expose 0.8160. Resistance is at 0.8346.

EURJPY

BULLISH

The recent setback is just a corrective phase within a bullish trend. Strong
support lies at 140.16. Resistance is at 143.29 ahead of 145.69.

*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

Australia
China
Japan

Norw ay

GMT Release/Event
AiG Perf. of
Service Index
22:30 (Dec)
Services PMI
01:45 (Dec)
Vehicle Sales
05:00 (Dec)

08:00

Germany 08:55
Euro
Area
Euro
Area
UK

09:00
09:00
09:30

Manufacturing
PMI (Dec)
PMI Serv ices
(Dec F)
PMI
Composite
(Dec F)
PMI Serv ices
(Dec F)
PMI Serv ices
(Dec)

Sentix Investor
Euro Area 09:30 Confidence

FX Morning Adviser 6 January 2014

Freq.

UBS

Prev/Rev Cons.

Actual

index

n/a

48.9

n/a

46.1

index

n/a

52.5

n/a

50.9

y-o-y

n/a

13.30%

n/a

18.70%

index

53.6

54.5

n/ a

index

54.0

54.0

54.0

index

52.1

52.1

52.1

index

51.0

51.0

51.0

index

59.5

60.0

60.5

index

n/a

8.0

9.5

 2

(Jan)
Germany 13:00 CPI (Dec P)

m-o-m

n/a

0.20%

0.40%

Germany 13:00 CPI (Dec P)

y -o-y

n/ a

1.30%

1.40%

m-o-m

n/a

0.20%

0.70%

y-o-y

n/a

1.60%

1.40%

m-o-m

n/a

-0.30%

0.20%

m-o-m

n/a

-2.30%

1.80%

index

55.0

53.9

54.5

m-o-m

1.40%

-0.90%

1.70%

m-o-m

0.70%

1.10%

0.80%

3mths/year 8.30%

7.70%

n/a

Germany 13:00
Germany 13:00

CPI EU
Harmonised
(Dec P)
CPI EU
Harmonised
(Dec P)
Industrial
Product Price
(Nov)
Raw Materials
Price Index
(Nov)

Canada

13:30

Canada

13:30

United
States

ISM NonManf.
Composite
15:00 (Dec)

United
States
UK
UK

Factory Orders
15:00 (Nov)
Halifax House
Prices (Dec)
Halifax House
Price (Dec)

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

FX Morning Adviser 6 January 2014

 3


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