Risk Appetite Improves
03/02/09 22:08
The improvement in risk appetite is due to a number
of factors. Namely, the stabilisation in PMIs in the
Eurozone, coupled with this week's improvement in
manufacturing ISM (both data sets for January) must
be removing some fears of further massive downside
risks. Also, various stimulus packages have been
announced, with Australia revealing a second stimulus
package yesterday and the BoJ announcing it will
purchase stocks held by Japanese banks. Indeed, this
morning, Australian retail sales for December rose a
staggering 3.8% m/m, fuelled by cash handouts from
government. There is the thought that this
demonstrates that government policy can be effective
in preventing a downward spiral in aggregate demand,
at least for the short term. But you know me, i'm not
convinced throwing cash at the problem is going to
demean the overall force of the down move. In US data
released overnight, pending home sales for December
rose by 6.3% m/m and above market expectations of a
flat result as home affordability rose. On a more
negative note, vehicle sales for January plunged, and
aggregate US car sales are now below China for the
first time.
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The plunge in car sales is a reminder that risk still lie ahead. In the short term risk appetite could still improve ahead of any further bank package to be revealed by the US Treasury next week. Overall though, would still prefer to play the US dollar from the long side, particularly against the euro.
EUR: PPI data showed further easing of inflation pressures, registering a 1.8% y/y reading (consensus 2.1%, prior 3.3%). ECB President Trichet has mentioned several times that the next important meeting will be in March. UBS economists still expect the next policy rate cut to come in March but the dropping inflation data and the worsening economy raise the possibility of a cut in February. At the very least, though, the latest data should cause a heated debate among the Governing Council, which has sounded differing opinions recently. For now, given the sometimes conflicting ECB commentary and the disappointing data, we prefer to be short EUR.
Retail sales for December rose by 3.8% m/m, well exceeding market expectations of a 1.4% m/m gain, but in line with UBS economic team's 4% m/m forecast. The surge in spending was on the back of government cash handouts. The fact that Australians chose to spend the money however is reassuring in that it points to healthy levels of confidence in the household sector despite global economic woes. The RBA cut rates by 100bp yesterday, broadly in line with expectations. The RBA justified the rate move on the basis of a significant deterioration in global conditions late in 2008. The RBA noted that it took into consideration the government fiscal stimulus package also announced today (note that the Treasury Secretary is on the RBA board). The RBA noted that "the combination of expansionary monetary and fiscal policies now in place will help to cushion the Australian economy from the contractionary forces coming from abroad." There are a number of factors that are supportive of AUD near term: (1) global PMIs are stabilising/improving; (2) major central banks are getting more creative on their quantitative/qualitative easing measures; (3) the US Treasury will announce further measures to assist the banking sector next week. We continue to target AUDUSD at 0.6500 over 1 and 3 months.
Ref: UBS