We Remain Risk Negative
26/05/10 08:29
We remain risk negative and continue to recommend to
sell on risk rallies. We become buyers of risk at key
levels discussed in Pro Traders Club and accumulate
using our volatility measure. Todays target sell
levels on GBPUSD and EURUSD discussed in PTC reviews
were hit within 20 pips. As well, AUDUSD and AUDJPY
order flow continues at high vol shifting from BF
levels. We have not seen a convincing flow back into
risk and view upside potential to be limited.
With much investor focus still centered on the euro, we occasionally get questions as to what can reverse the recent decline. It is a difficult question as it is much easier in the current environment to identify what policymakers can do to exacerbate, rather than improve, the situation, and we still think the euro remains a sell on rallies.
In a recent UBS Multi-Strategy Asset conference call, chief UBS economist and strategist, Larry Hatheway, said there are two opposing forces to the macro backdrop. There are negative concerns emanating from insolvency issues and growth worries while on the positive side, the global economic backdrop is still somewhat robust. Another positive factor he identified was that the recent decline of the euro should confer trade benefits to the Eurozone. Data of Euro Area 16 exports to the rest of the world does show a marked pick up in export volume amid the euro's recent decline. Though we do not have a dollar or euro figure on how much of an effect the weaker euro is having on trade, the improving trade should mitigate some of the negative concerns on the Eurozone.
With much investor focus still centered on the euro, we occasionally get questions as to what can reverse the recent decline. It is a difficult question as it is much easier in the current environment to identify what policymakers can do to exacerbate, rather than improve, the situation, and we still think the euro remains a sell on rallies.
In a recent UBS Multi-Strategy Asset conference call, chief UBS economist and strategist, Larry Hatheway, said there are two opposing forces to the macro backdrop. There are negative concerns emanating from insolvency issues and growth worries while on the positive side, the global economic backdrop is still somewhat robust. Another positive factor he identified was that the recent decline of the euro should confer trade benefits to the Eurozone. Data of Euro Area 16 exports to the rest of the world does show a marked pick up in export volume amid the euro's recent decline. Though we do not have a dollar or euro figure on how much of an effect the weaker euro is having on trade, the improving trade should mitigate some of the negative concerns on the Eurozone.
UBS
European officials have not expressed a significant amount of concern for current euro levels (the trade-weighted real euro index is about 8% higher than its long-term average). While this means that the euro likely has more room to weaken, it ties back into the previous point that we could see increasing trade benefits for the Eurozone as a result, though we remain structurally negative on the euro at present.
Fed Chairman Bernanke said the Fed does not want to want to provide USD swap lines on a permanent basis and that pressure should be applied to banks so they better manage currency exposures to avoid depending on swap lines in future.
St. Louis Fed President Bullard's comments were consistent with the Fed unwinding policy accommodation at a very gradual pace. The minutes of the Federal Reserve Board's discount rate meeting in April showed three of the 12 regional Fed banks (Kansas City, St. Louis, and Dallas) wanted to raise the discount rate by 25bp to 1%. The banks that preferred a discount rate hike suggested doing so would represent "another step toward restoring a pre-crisis discount rate structure".
Moody's said the outlook for the US AAA rating is still stable, but observed that the debt-to-GDP ratio is deteriorating sharply, and will eventually likely be higher than other AAA countries. Moody's added that the rating could come under pressure if measures are not taken to stabilise debt ratios and interest costs.
Portugal's debt management agency hopes to auction up to EUR1 bn in 5y notes today. Although yesterday's auction of Spanish T-bills was well covered, yields rose significantly, and the euro is likely to be sensitive to any disappointments today.
Investors appear to have moved on from Greece and are now targeting systemic problems in the Eurozone. The lack of clarity is probably the key driving force behind risk aversion at present, while regulatory woes are also under scrutiny. There are also signs of discord within the Eurozone, with German Economy Minister Rainer Bruderle warning that Germany was against issuing a joint EUR bond as it would "reward members states pursuing wrong policies". There were also reports Germany's Finance Ministry proposed extending a ban on naked short-selling beyond certain financial stocks. The German cabinet is supposed to discuss the draft bill next week.
Watch for more facts to portray structural Eurozone weakness in the months to come.
Source: UBS, Bloomberg, Chris Lori