Euro Rebound Continues
EURUSD continued its rebound on Thursday, trading in a 1.2839-1.2972 range against the dollar on the back of strong auction results and hopes of a satisfactory conclusion to PSI talks in Greece. Spanish and French auctions were taken favorably by the markets and the euro pushed higher in the European session. The IIF will continue discussions on Friday and a deal is already expected, though wires have suggested several different proposals remain on the table. In addition, expectations have reached a certain level such that any potential missteps could prove costly for sentiment. Nevertheless, given the information flow over the past week most investors would likely not want to be excessively short the euro, or hold positions which express a similar view to the downside. The Troika have clearly stated that there won’t be fresh funding for the country’s upcoming payment requirements until the PSI is settled, and a satisfactory resolution removes one further barrier towards crisis resolution, though from a wider standpoint, macro adjustment throughout the Eurozone must be a priority and on this front good news will be far harder to come by. For example, there is no guarantee that Greece will embark on a sustainable debt path post- PSI. In addition, scrutiny over the fiscal compact will return, and reports today suggest again that the final agreement may not prove as watertight as agreed during the initial discussions as once again allowances for ‘exceptions’ are being made. Late during the US session, Moody’s warned that while a disorderly default in Greece is not their ‘central case view’, the probability is rising. An orderly decline in the Euro remains a part of that process; improvements on the Greek front will help ensure financial stability, and more importantly avert wider sovereign contagion, but we believe investors will need to be cognizant of the wider macro backdrop. Ahead on Friday, markets will be looking for further assurances that the global economy will be able to avert recession, especially if the flash manufacturing PMI out of China rebounds back above 50. UK retail sales figures are due in the UK, and CPI figures are due in Canada. USDJPY traded in a 76.70-77.32 range on Thursday.
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UBS Investment Bank