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Global FX Strategy Research Global UBS Investment Research Research Note The Morning Adviser Foreign Exchange Dollar On The Ropes 30 April 2012 www.ubs.com/fx Gareth Berry FX Strategist firstname.lastname@example.org +65 6495 5232 The US dollar sold off across the board on Friday after Italy managed to auction bonds successfully despite Spain’s downgrade by S&P earlier. A weak US GDP report for Q1 inflicted further damage, leading to another round of dollar selling. Headline US growth slowed to +2.2% annualised rate (cons. 2.5%, prev. 3.0%). The miss added credibility to Fed Chairman Bernanke’s generally dovish assessment of the economic outlook. Indeed, it seems market expectations of further easing have risen again, with the S&P500 back above 1400 and gold climbing $10/oz shortly after the GDP print. USDJPY remains heavy too as a result, despite the BoJ announcing yet another round of bold policy easing on Friday. Although the pair eventually managed to scramble higher in the wake of the policy announcement itself, falling US yields eventually got the upper hand, and took USDJPY back down to a two-week low. We keep our bullish 3m USDJPY forecast of 85 but recognize that upcoming data flow will be a critical determinant of near term direction. On that front, there is no shortage of potential triggers this week with PCE inflation due today, the manufacturing ISM on Tuesday, and jobless claims on Thursday ahead of Friday’s non-farm payrolls report. Always an important number, payrolls will assume an even greater significance on this occasion given ongoing uncertainty over whether the US economy is set to suffer another summer slowdown as it did in both 2010 and in 2011. Our US economics team is on the bullish side of consensus, expecting the unemployment rate to drop to 8.1% (cons. 8.2%) and for the headline payrolls number to come in at +170k (cons. +165k). For the Australian dollar, Tuesday’s RBA policy meeting will be a key focus, preceded by a pair of PMI readings out of China. Our economists expect no change from the ECB on Thursday. Key Events 30 April 2012 Source: UBS Global Economics Country GMT Release/Event Frequency UBS Prev/Revised Consensus Actual New Zealand 22:45 Trade Balance (Mar) NZD mn 600 161 417 Australia 01:00 HIA New Home Sales (Mar) m-o-m n/a 3.00% n/a New Zealand 01:00 NBNZ Business Confidence (Apr) index n/a 33.8 n/a Australia 01:30 Private Sector Credit (Mar) m-o-m 0.30% 0.40% 0.30% Euro Area 08:00 Euro-Zone M3 sa (Mar) y-o-y 3.20% 2.80% 2.80% Euro Area 09:00 Euro-Zone CPI Estimate (Apr) y-o-y 2.50% 2.60% 2.50% Canada 12:30 GDP (Feb) y-o-y n/a 1.70% 2.10% United States 12:30 PCE Core (Mar) y-o-y n/a 1.90% 1.80% United States 13:45 Chicago Purchasing Manager (Apr) index n/a 62.2 60.5 Research Spotlight Aussie Early Warning System UBS G10 FX Strategy We expect the Australian dollar to weaken over the coming months, but not dramatically - to parity on a 3m horizon. China, being Australias biggest export market, might cause us to become very AUD-bearish. Mine reports, Australian port exports, Chinese steel production, Chinese ore and steel inventories and the outlook for iron ore prices each could give us advance warning of trouble, but arent. Most important, however, is copper, which exerts its influence on AUD via risk appetite. Please see http://www.ubs.com/fx for details.This report has been prepared by UBS LimitedANALYST CERTIFICATION AND REQUIRED DISCLOSURES BEGIN ON PAGE 5
The Morning Adviser 30 April 2012EUR Targets: EURUSD 1m 1.30, 3m 1.25 ECB Governing Council member Constancio said that the ECB’s ongoing concerns do not necessarily mean a new 3y LTRO is needed. Germany’s Chancellor Merkel appeared to throw her weight behind the idea of complementing fiscal austerity and economic reforms with a growth agenda. In a weekend press interview she suggested that politicians might “further strengthen the capabilities” of the EIB, and use European structural funds more flexibly in a bid to stimulate growth. UK Prime Minister Cameron said the Eurozone is not even half-way through its debt crisis. Germany’s Finance Minister Schaeuble said the downgrade of Spain on Friday makes the situation even more critical. S&P’s Kraemer said that if that Spain’s fiscal position worsens more than the ratings agency currently expects, then further downgrades are likely. Michael Meister, a minister in Germany’s ruling coalition, referred to S&P’s decision to downgrade Spain last week. He said that Germany’s position continues to be “that banks cant have direct access to Europes financial backstops”.JPY Targets: USDJPY 1m 80.00, 3m 85.00 Bank of Japan Governor Shirakawa downplayed the possibility of an imminent round of further policy easing, noting that a reckless approach to easing could destabilize the economy. He added that the BoJ cannot be expected to implement new policy steps every month. Official Ministry of Finance data show that Japan did not intervene between Mar 29-Apr 25. The last intervention operation took place in November 2011.CHF Targets: EURCHF 1m 1.20, 3m 1.20 SNB Chairman Jordan said the SNB is ready to take further measures "at any time". He added the EURCHF floor breach on April 5 was "only for a few seconds", that the Swiss franc remains "overvalued" at 1.20, and the SNB are present in currency markets "at all times". There is nothing new in these remarks, and CHF spot was unmoved.CAD Targets: USDCAD 1m 0.99, 3m 0.98 Bank of Canada Governor Carney said that the persistent strength of CAD is a challenge but that the bank is not obsessed with the level of the currency. He praised Canada’s employment performance as “remarkable” and said it is realistic to expect sizeable CAD inflows. He pledged to adjust interest rates as appropriate. UBS 2
The Morning Adviser 30 April 2012FX TechnicalsGBPUSD clears 1.6261 Next target resistance is at 1.3386; a break below the level would open the EURUSD BULLISH key high of 1.3487. Support lies at 1.3158. With resistance at 81.78 intact, a push below the key support of 80.30/10 USDJPY BEARISH would trigger extension of weakness towards 79.55. Bullish trend conditions persist; the recovery through 1.6261 could trigger GBPUSD BULLISH extension of gains towards 1.6334. Initial support is at 1.6150. Recent weakness has shifted our focus to support at 0.9002, where a break USDCHF BEARISH would open 0.8931. Resistance is at 0.9134. AUDUSD NEUTRAL Initial support is at 1.0350. Outlook is bearish; the decline through 0.9800 opens 0.9766. Resistance is at USDCAD BEARISH 0.9881. EURCHF NEUTRAL Resistance is at 1.2049 ahead of 1.2070, while support lies at 1.2000. A close below 0.8142 would signal extension of weakness towards 0.8068. EURGBP BEARISH Resistance is at 0.8222. Look for a clear break below 106.32 to open important support at 104.61/24. EURJPY BEARISH Resistance is at 108.03.*NOTE: The trend for each currency pair as defined in the table is determined by our proprietary model and is independent of our discretionary interpretationof price action UBS 3
The Morning Adviser 30 April 2012Key Events 30 April 2012 Source: UBS Global EconomicsCountry GMT Release/Event Frequency UBS Prev/Revised Consensus ActualNew Zealand 22:45 Building Permits (Mar) m-o-m n/a -6.70% 6.00%New Zealand 22:45 Trade Balance (Mar) NZD mn 600 161 417UK 23:01 Hometrack Housing Survey (Apr) m-o-m n/a 0.20% n/aUK 23:01 Hometrack Housing Survey (Apr) y-o-y n/a -1.00% n/aAustralia 00:30 TD Securities Inflation (Apr) m-o-m n/a 0.50% n/aAustralia 00:30 TD Securities Inflation (Apr) y-o-y n/a 1.80% n/aAustralia 01:00 HIA New Home Sales (Mar) m-o-m n/a 3.00% n/aNew Zealand 01:00 NBNZ Business Confidence (Apr) index n/a 33.8 n/aAustralia 01:30 Private Sector Credit (Mar) m-o-m 0.30% 0.40% 0.30%Australia 01:30 Private Sector Credit (Mar) y-o-y 3.20% 3.50% 3.20%New Zealand 03:00 Money Supply M3 (Mar) y-o-y n/a 5.20% n/aSweden 07:30 Household Lending (Mar) y-o-y 4.90% 5.00% n/aEuro Area 08:00 Euro-Zone M3 sa 3 mth ave. (Mar) y-o-y 2.80% 2.30% 2.70%Euro Area 08:00 Euro-Zone M3 sa (Mar) y-o-y 3.20% 2.80% 2.80%Euro Area 09:00 Euro-Zone CPI Estimate (Apr) y-o-y 2.50% 2.60% 2.50%Canada 12:15 BoCs Lane SpeaksCanada 12:30 GDP (Feb) m-o-m n/a 0.10% 0.20%Canada 12:30 GDP (Feb) y-o-y n/a 1.70% 2.10%Canada 12:30 Industrial Product Price (Mar) m-o-m n/a 0.20% 0.20%Canada 12:30 Raw Materials Price Index (Mar) m-o-m n/a -0.50% 0.20%United States 12:30 Personal Income (Mar) m-o-m n/a 0.20% 0.30%United States 12:30 Personal Spending (Mar) m-o-m n/a 0.80% 0.40%United States 12:30 PCE Deflator (Mar) y-o-y n/a 2.30% 2.20%United States 12:30 PCE Core (Mar) m-o-m n/a 0.10% 0.20%United States 12:30 PCE Core (Mar) y-o-y n/a 1.90% 1.80%Euro Area 13:30 ECB Announces Bond PurchaseUnited States 13:45 Chicago Purchasing Manager (Apr) index n/a 62.2 60.5United States 14:00 Revisions: Retail SalesUnited States 14:30 Dallas Fed Manf. Activity (Apr) index n/a 10.8 n/aUnited States 21:30 Feds Fisher SpeaksGermany Retail Sales (Mar) m-o-m 0.30% -1.10% 1.10%Germany Retail Sales (Mar) y-o-y n/a 1.70% 0.50%China Leading Index (Mar) index n/a 101.27 n/aSource: UBS Economics UBS 4
The Morning Adviser 30 April 2012Analyst CertificationEach research analyst primarily responsible for the content of this research report, in whole or in part, certifies that withrespect to each security or issuer that the analyst covered in this report: (1) all of the views expressed accurately reflecthis or her personal views about those securities or issuers and were prepared in an independent manner, including withrespect to UBS, and (2) no part of his or her compensation was, is, or will be, directly or indirectly, related to the specificrecommendations or views expressed by that research analyst in the research report.Required DisclosuresThis report has been prepared by UBS Limited, an affiliate of UBS AG. UBS AG, its subsidiaries, branches and affiliatesare referred to herein as UBS.For information on the ways in which UBS manages conflicts and maintains independence of its research product;historical performance information; and certain additional disclosures concerning UBS research recommendations,please visit www.ubs.com/disclosures . The figures contained in performance charts refer to the past; past performance isnot a reliable indicator of future results. Additional information will be made available upon request. UBS Securities Co.Limited is licensed to conduct securities investment consultancy businesses by the China Securities RegulatoryCommission. UBS 5