[T.S.R:18246] UBS-Now That's A Rally!

The highlight of trading on Wednesday was the SNP touching 1300 for the first time in a year. Rate cuts in Brazil, Australia, Indonesia and policy rates on hold in India. Relaxed reserve requirements in China and the unveiling of a $ 35 bn infra stimulus from the GOI implies that Governments across the globe are seeking growth, and Central Banks will coordinate policy action to facilitate that.

 

Spending to growth is the only way out of a logjam caused by sticky unemployment and lare pools of Debt on the books of Governments in the West. Whether long term problems remain or not, the fact remains that for the moment they have been pushed down the road and markets are benefiting.

 

Investors need to note, the latest steps are in continuation of what the ECB and ESFF have been trying to do since December last.  

 

The announcement that major central banks are coordinating policy to ease the cost and shortage of USD liquidity sparked a significant rally for risk assets in the US session. In a surprise but much-needed move, the ECB, in coordination with the Fed, Bank of Canada, BoJ, BoE and SNB have decided to cut the cost of the existing temporary US dollar liquidity swaps from OIS + 100bp to OIS + 50bp. Bilateral cross-currency swap lines will also be established and the operations will now be extended into 2013.

 

To alleviate the situation further, the ECB has also cut the margin on the 3-month operations from 20% to 12%. The EUR rallied back to 1.35 from 1.33 after the release, and the dollar has fallen across the board. AUDUSD has gained 3% from the day's low, although there was a slight correction later in the afternoon. The move came in a context of broad 'risk on', which was further supported by strong employment data in the US and a Required Reserve Ratio cut in China.

 

We view the RRR announcement as slightly more than a symbolic gesture but it was not entirely unexpected given that policy easing has been underway across parts of China in recent weeks The ADP print came in at +206k, significantly above consensus. Chicago PMI for November was also strongly above consensus at 62. In the short term, we believe the rally will continue as further short positions are squeezed and expectations for political developments in Europe remain intact.

 

However, we question its sustainability in the longer term, particularly for EURUSD, as none of the underlying problems have changed.

 

 

Safe Harbor Statement:

Some forward looking statements on projections, estimates, expectations & outlook are included to enable a better comprehension of the Company prospects. Actual results may, however, differ materially from those stated on account of factors such as changes in government regulations, tax regimes, economic developments within India and the countries within which the Company conducts its business, exchange rate and interest rate movements, impact of competing products and their pricing, product demand and supply constraints.

 

Nothing in this article is, or should be construed as, investment advice.

 

 

 

 

 

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