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

Global Research

12 February 2014

FX Morning Adviser

FX

GBP's Demand Issues

Global

Liquidity Preference Immune to Guidance Tweaks (so far)
The policy implications from the BoE's inflation reports will dominate proceedings for
short-dated interest rates, and sterling by extension. However, for investors looking at
structural trends and concerned about the nature of the UK's economic growth, any
form of MPC guidance seems to matter far less. Liquidity preference for sterling
remains highly challenged, for which stable FDI flows will struggle to compensate.
Given the concept itself can be rather ill-defined, liquidity preference for a specific
currency is often hard to tally: under normal circumstances rate/return differentials take
precedence and it is a peripheral driver. During stress periods, however, true demand
divergences begin to show, e.g. the sharp rise in dollar funding costs or the massive
inflows into Switzerland during the Eurozone crisis. When such preference reaches
critical mass, a currency impact is felt. Although the establishment of liquidity facilities
has reduced the nominal funding cost for individual currencies, expression of
preference can still be felt via the currency. Physically this can come in the form of
inflows purely for liquidity purposes, such as non-resident deposits (Figure 1). For
sterling, there was a structural drop post the 2008 period of volatility, driven by
financial sector 're-rating' of and its safety perception. Due to the Eurozone crisis,
however, there was brief recovery – for all of the UK's problems sterling's very existence
was never in doubt – but since the advent of the ECB's new facilities, this 'preference
driver' for sterling has fallen once again, without any sign of momentum reversing.

Figure 1: Liquidity preference declining again

Figure 2: Valuations matter for PI not DI

Source: Macrobond, UBS calculations

Source: Macrobond, UBS calculations

Low UK yields and lack of risk aversion may have hit liquidity preference in the form of
deposits, but the picture is none the brighter for portfolio investment on the financial
account. The same collapse seen in 2008 is repeated, though here momentum has
reversed (Figure 2, as of Q3 2013), responding to improving growth and asset returns.
Attractive valuations may be more important for external investors, but aggregates
remain well off the highs seen pre-2008, while scrutiny over the sustainability of
growth (and by extension asset returns) is far closer. One bright spot for sterling has
been the consistency in FDI flows which is well documented: it is also one source of
financing which appears to be largely neutral to currency swings. As such, it suggests
all is not lost for GBP – though this category likely covers 'UK (non-financial) asset
preference' as opposed to liquidity preference outright. However, this pillar, no matter
how sturdy, will struggle to bear the weight of the UK's financing gap alone – new
support mechanisms are needed, design of which is largely beyond the BoE's remit.

www.ubs.com/fx

Technical FX
EURUSD

NEUTRAL

Fresh selling materialised on Tuesday from retracement resistance at
1.3685. Initial support is at 1.3580, a breach of which would extend
weakness to 1.3477.

USDJPY

NEUTRAL

The latest recovery suggests extension of the broader consolidation phase.
Resistance is at 103.10 and 103.65. Support is at 101.47 ahead of
100.76.

GBPUSD

NEUTRAL

The pair bounced sharply over the past few sessions from the main
support at 1.6220. Resistance focus is at 1.6509, a break above which
would be positive, opening the way to 1.6668.

USDCHF

NEUTRAL

There is a strong support at 0.8903. A break through this level would be
negative, triggering a deeper sell-off to 0.8800. Resistance is at 0.9011
ahead of 0.9082.

AUDUSD

NEUTRAL

There’s risk for extension of the recovery but from a broader perspective
upside will be limited to resistance at 0.9086. Support is at 0.8907 ahead
of 0.8730. Only a close above 0.9086 will be a major bullish development.

USDCAD

BULLISH

While support at 1.0981 holds on closing basis, there’s potential for
resumption of the bullish trend. Resistance is at 1.1126 ahead of 1.1236.

EURCHF

NEUTRAL

The cross has been recovering and unwinding the recent sharp sell-off.
Resistance is at 1.2265, a break through which will extend the strength to
1.2314. Support is at 1.2220 ahead of 1.2167.

EURGBP

BEARISH

While resistance holds on closing basis at 0.8349, the cross remains
vulnerable as bearish conditions persist. Support is at 0.8259 ahead of
0.8160.

EURJPY

NEUTRAL

The latest recovery confirmed a close above resistance at 139.84,
indicating potential extension of the strength to next main resistance at
142.08. Support at 138.26 ahead of 136.23.

*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

GMT

Release/Event

Australia
Australia
Japan
Japan
Japan
Japan
Japan
United States
United States
China
Switzerland

23:30
23:30
23:50
23:50
23:50
23:50
23:50
01:00
01:10
02:05
08:15

Westpac Cons. Confidence Index (Feb)
Westpac Consumer Confidence sa (Feb)
Tertiary Industry Index (Dec)
Money Stock M2 (Jan)
Money Stock M3 (Jan)
Machine Orders (Dec)
Machine Orders (Dec)
Fed's Lacker Speaks
Fed's Fisher Speaks
Trade Balance (Jan)
CPI (Jan)

Freq.

UBS

Prev/Rev

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

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

103.3
-1.70%
0.80%
4.30%
3.40%
9.30%
16.60%

Sw itzerland
Switzerland
Switzerland

n/a
100.2
n/a
-3.00%
-0.30% -0.40%
4.20%
4.40%
3.40%
3.50%
-4.00% -15.70%
17.40% 6.70%

USD bn
m-o-m

27.10
-0.30%

25.64
-0.20%

23.45
-0.30%

08:15 CPI (Jan)

y -o-y

0.10%

0.10%

0.10%

08:15 CPI EU Harmonized (Jan)
08:15 CPI EU Harmonized (Jan)

m-o-m
y-o-y

n/a
n/a

0.20%
0.30%

-0.30%
0.40%

Norw ay

09:00 GDP (Q4)

q-o-q

0.50%

0.70%

0.50%

Norway

09:00 GDP Mainland (Q4)

q-o-q

0.40%

0.50%

0.40%

Euro Area

10:00 Industrial Production sa (Dec)

m-o-m

n/ a

1.80%

-0.30%

Euro Area

10:00 Industrial Production wda (Dec)

y-o-y

n/a

3.00%

1.80%

UK

10:30 BoE's Carney Presents Quarterly Inflation Report

FX Morning Adviser 12 February 2014

Cons.

Actual

31.86

 2

Euro Area
United States
United States
Canada
Canada

11:10
12:00
13:45
14:00
14:00

Euro Area

15:30 ECB's Draghi Speaks

Euro Area

18:30 ECB's Coeure Speaks

United States
New Zealand
China
China
China

ECB's Praet Speaks
MBA Mortgage Applications (Feb-7)
Fed's Bullard Speaks
Teranet/National Bank HPI (Jan)
Teranet/National Bank HPI (Jan)

m-o-m

n/a

0.40%

n/a

m-o-m
y-o-y

n/a
n/a

0.10%
3.80%

0.00%
n/a

19:00 Monthly Budget Statement (Jan)
21:30 BusinessNZ Manufacturing PMI (Jan)

USD bn
index

-10.0
n/ a

2.9
56.4

-10.0
n/ a

New Yuan Loans (Jan)
Aggregate Financing RMB (Jan)
Money Supply M2 (Jan)

CNY bn
CNY bn
y-o-y

1250.0
1900.0
13.50%

482.5
1232.2
13.60%

1100.0
1900.0
13.20%

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

FX Morning Adviser 12 February 2014

 3


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