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    EURUSD: UBS cut its outlook for the EUR relative to the USD to 1. For 2012 and 1. For 2013 vs. Current level 1.28. The dollar has rallied as economic data has surprised to the upside providing evidence that a change in the relationship between risk and the USD is taking place.

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    Mkt Perspectives Issue 3

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    EURUSD: UBS cut its outlook for the EUR relative to the USD to 1. For 2012 and 1. For 2013 vs. Current level 1.28. The dollar has rallied as economic data has surprised to the upside providing evidence that a change in the relationship between risk and the USD is taking place.

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    14 views1 page

    MKT Perspectives Issue 3

    Uploaded by

    barrettdaniel
    EURUSD: UBS cut its outlook for the EUR relative to the USD to 1. For 2012 and 1. For 2013 vs. Current level 1.28. The dollar has rallied as economic data has surprised to the upside providing evidence that a change in the relationship between risk and the USD is taking place.

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    DanBarrett UBSFinancialServices 9733604247

    MarketPerspectives Issue3
    tobreakdownastheUSDreactspositivelyto outperformanceindomesticgrowthandtheEUR weakens. TheS&Pvs.theUSD Itisfairtoaskifstockscansustainpositive performanceinthefaceofastrongerdollarbecause formuchof20092011,USstocksfellwhenthe dollarstrengthened.Theshortanswerisyes, assumingrecenttrendshold.Ashasbeenthecase sincetheFall,thestrongerdollarreflectsimproving fundamentalsintheUSeconomy(includingboth laborandhousingmarkets),limitedconcernre:price inflationordeflationandastillvigilantFedunlikely toannounceanynewextraordinaryprograms. NothingGoesUporDownInaStraightLine Investorsshouldconsiderthesehouseviews: EURUSD:UBScutitsoutlookfortheEUR relativetotheUSDto1.15for2012and 1.10for2013vs.currentlevel1.28. Pastexperiencesuggestsforecastersadjust toeconomicdatasurpriseslesseningthe scopeformoresurprisesinnearterm.

    Whatishappeningwiththedollar? UBSstrategistshavehighlightedthesteadyrisein thefirm'sUSgrowthsurpriseindexsincelastFall. TheseSurpriseIndicesaredesignedtocapturethe frequencyinwhicheconomicdatabeatsormisses consensusforecasts.Anupwardmoveintheindex suggeststhetrendineconomicactivityisbetterthen economistsareforecasting.AsIhavediscussedin priorissues,thesignificantinfluencethateconomic datahasonfinancialmarketshasneverbeengreater thanitistoday. Thedollarhasralliedaseconomicdatahassurprised totheupsideprovidingevidencethatachangein therelationshipbetweenriskandtheUSDistaking place.Itisinterestingthataninverserelationship betweentheUSDandUSeconomicsurpriseindices heldformuchof2011.Thisisrelatedtothepopular notionofriskon/riskofftradingwhere disappointingUSeconomicdatageneratedrisk aversionamonginvestors,resultinginastrongUSD. WatchtheUSDandtheEuro(EUR) Followingthefinancialcrisisin2008,extraordinary actiononbehalfoftheFedledtovolatiletradingin thedollar.Thedollarbecameasafehavenintimes ofriskaversion(strongerUSD)andthefunding currency,duringriskonperiods,forinvestmentsin stocksandcommodities(weakerUSD). Asweexit2011,thetrendinthedollarvs.theEuro (EUR)iscriticalasitisrepresentativeofthechange intherelationshipbetweentheUSDandriskier assets.Increasinglyaggressiveactionbythe EuropeanCentralBankinresponsetotheregion's sovereigndebtcrisishasweakenedtheEURasit replacestheUSDasthefundingcurrencyofchoice. Whydoesthismattertoinvestors? Asdiscussedinourmostrecentissue,correlations betweenassetclasseshaveincreased,particularly duringperiodsofstressinfinancialmarkets.During thepostfinancialcrisisperiod,broadriskon/riskoff tradinginmarketswentlikethisRiskOn(USD lower,EURhigher,Treasurieslower,Stocks& Commoditieshigher)andviceversa.Thisisstarting

    Investorsrealizenothinggoesupordownina straightline.WeexpecttheUSDtooutperformbut therewillbetimeswhentheEURrallies(ie.concern regardingthesovereigndebtcrisisebbsforaperiod oftime).Weexpectanunevenyearforeconomic growthintheUSbutforecastastrongerfinishto 2012. WorryButStayInvested Intheend,investorsshouldremainconcerned aboutEuropeandotherissues,butstayedinvested whiletheyworry.Dynamicassetallocationandrisk diversificationstrategieswilladdressyourconcerns andlimitdownsideexposureofanyonefinancial market.Iamhappytodiscussyourconcernsand investmentobjectives,alwayskeepinginmindthe goalofmaximizingyourriskadjustedreturns.

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