AUDJPY prices below 79.00 are buying opportunities in our view. We will tranche below 79.00 (if there is impactful AUD sell off, we will wait til 76.00 to 78.00 range). USDJPY may see 78.00, at which AUDJPY longs will look attractive. We are holding and waiting for AUDUSD to return to below 97.00 and welcome a much deeper retrace. We will be following these movements and levels closely in Pro Traders Club and share our positioning.
We expect the accelerating trend in growth to continue into Q4, but even this faster pace is unlikely to have much of an impact on the stubbornly high unemployment rate. We continue to expect an open-ended commitment from the Fed, with up to $1tln in purchases of long-term Treasury securities over the next few quarters. If the proposed QE program is $1tln, the USD will remain weak.

Following 4.1% global GDP growth in 2010, the pace of expansion is likely to moderate to a trend-like rate of 3.75% in each of the next two years. De-leveraging in advanced economies and superior emerging growth will likely continue. We envisage gradual global recovery, unaccompanied by higher inflation. But the risks are considerable and policymakers will have to navigate the monetary and fiscal shoals skillfully indeed.

Recent…


Swiss PMI for October fell broadly in line with consensus at 59.2, providing s solid reading, despite strong CHF strength.

Changed forecast for the timing of the first ECB hike now seen coming no earlier than Q3 2011, one calendar quarter later than forecast previously. The rationale is that Eurozone growth may be adversely affected by the euro's appreciation, and the ECB will hardly want to start hiking before the Fed. UBS economists currently expect the Fed to start hiking the Fed Funds target in Q3 2011. This will put the EURUSD on weaker footing in the months to come and we look forward to see what will trigger a move lower in the pair.

The public finances of peripheral Eurozone nations continue to draw unwanted attention, and sovereign bond spreads over bunds remain elevated. Ireland's Prime Minister Cowen said the government is taking all necessary steps to address economic problems. The Irish 2011 budget, which is still being framed, is scheduled to be put to a parliamentary vote on Dec. 7. In Portugal, the minority Socialist government and opposition Social Democrats reached an agreement on the 2011 budget on Saturday. A first vote in parliament is scheduled for Wednesday.

SNB Chairman Hildebrand said that the global economy is not in the midst of a "currency war.” I agree, it’s all media hype with a fancy tag line to grab viewers attention so the network can pay some electrical bills for those flashy lights and graphics to keep supposedly intelligent viewers attention.

USDJPY suddenly spiked 80 pips before falling again. Reuters reported that Director General Nakao of the MoF's International Bureau declined to comment on the price action.

Economics Minister Kaieda said that the government would "take steps against steep rises of the yen", but warned that it is also important for the private sector "to transform its structure" to adapt to a stronger yen. He said that markets should decide FX rates, but that "if an inflow of speculative money" were to cause "a drastic change, like a 10-yen move in a month, we need to intervene in the market".

As part of its regular monthly disclosures, the MoF confirmed that no FX intervention took place between Sept. 29 and Oct. 27 inclusive. This strongly suggests that Japan's latest intervention campaign has so far been confined to a single day on Sept. 15.

UK PMI rose unexpectedly in October to 54.9, beating consensus of 53.0. this figure improves on September's low and provides further evidence that the BoE is unlikely to look for more QE policy in the near future. This is bearish for EURGBP and should be sold at current levels.

The AUD received a significant boost from a better-than-expected PMI reading from China. Australia's own manufacturing PMI also strengthened in October, rebounding to 49.4 (prev. 47.2). House prices rose by +0.1% q/q in Q3, just fractionally above expectations that they would holds steady. The RBA is due to meet tomorrow, and no change in the cash rate is expected. There are a few banks expecting a hike, which would cause a rally to be sold into.

This week’s modest Q3 CPI result has seen markets pare back expectations for the RBA to raise the cash rate next Tuesday.

This latest inflation result means the RBA faces another finely balanced decision this month, after its surprise decision to keeping rates on hold in October. Many banks retain the view that the RBA will lift the cash rate by 25 bps next week.
This lower starting point for inflation, combined with the higher AUD, which has risen 5% since August, makes it likely that the RBA will revise down its short-term inflation outlook. But, with the Bank unlikely to change its view that Australian economic growth will accelerate next year, we would expect its forecast for inflation to rise to a peak of 3.0% will be unchanged. It might just now take a little longer to get there.
In the near term, Australia ’s lower inflation and higher currency will dampen price pressures for tradable goods and has prompted a downward revision to our CPI forecasts for the next three quarters. Longer term, some Australian banks are still forecasting both headline and core inflation to reach 3.0% by late 2011 and to remain at or above 3% until late 2012.
Elsewhere, the Bank of Japan modified its QE program and will now buy lower-rated (BBB) corporate bonds in an attempt to provide further stimulus to the economy. They have also advanced their next policy meeting to occur a day after the FOMC meeting.. In the US , further speculation on pending QE announcements was the key focus of markets (see our forthcoming FOMC preview).

Source: Chris Lori, UBS

Tags: Risk