UBS - "Financial markets expect the Federal Reserve will continue purchasing $85bn a month of assets until its March 18-19 Open Market Committee meeting. Friday's employment report showed November payrolls growth again exceeded 200k. But the dollar lost ground against the euro, pound, Swiss franc and commodity currencies while the S&P rose 1.1% to 1805. Stronger growth prospects supported the Australian and New Zealand dollars. Expectations the Fed will still delay tapering pushed the greenback down against European currencies. Only higher US yields helped the dollar against the yen as ten year US Treasury rates closed at 2.85%.
In our view currency markets have become too pessimistic on the dollar's near term prospects particularly with the euro trading at 1.37, Cable above 1.63 and the Swiss franc through 0.90. UBS Economics expects the FOMC will agree at its January 28-29 meeting to start cutting bond purchases while an earlier move at the December 17-18 FOMC meeting should not be ruled out either. This week's key points for currencies are:
- Fed increasingly close to tapering, don't sell dollars
- ECB reluctance to ease temporarily supporting euro
- BoJ set to stay on hold until April but USDJPY will remain bid
- strong UK data increasingly priced into sterling
- SNB to keep policy unchanged at its December meeting
- Australian payrolls key in the week ahead for currency
- take profits on AUDNZD shorts ahead of RBNZ meeting"