BoE Split On QE
Risk assets continued to trade heavy in Europe and the euro came under slight pressure after some weaker Eurozone PMIs. USDJPY finally broke through 80 and pushed higher throughout the session. A senior official said there is nothing strange about USDJPY at 80, and the JPY weakening is due to the BoJ’s timely easing and a better risk environment, while the Nordic currencies outperformed again. The BOE minutes for the February meeting revealed that the MPC voted 7-2 to increase the QE program by GBP50 bn. The dovish members Miles and Posen called for GBP75 bn however, which led to a slight sell-off in GBP Earlier, the February China HSBC flash PMI improved to 49.7 although export orders were fairly soft at 47.4. The euro has failed to push on following this week’s talks and it is clear the fixed income market needs to brace for a Greece credit event. However, this was still preferred to an outright default in a disorderly fashion, and the removal of relevant risks was a reason for other risk assets to rally. Although we remain highly doubtful that the upcoming process in Greece and future developments in the Eurozone sovereign debt crisis will be orderly, the growth differentiation element alone would be enough to damage the euro as fundamentals based on austerity-alone growth policies are highly unlikely to trigger the growth-seeking flows needed for sustained Euro strength. To ring-fence the rest of the Eurozone in anticipation of a credit event in Greece, we believe the ECB will have little choice but to deploy its balance sheet with greater ambition, pushing its total asset holdings beyond a inflexion point where debasement fears may undermine any gains attained from the financial stability. Without the necessary growth based policies – which are being called for increasingly by leaders in southern Europe – the ECB is the stimulus source of last resort. At this stage, intra-Eurozone adjustment is off the table and with the focus set to stay on Greece in the immediate future, we doubt the Eurozone’s leaders have enough political capital to calibrate policy. Existing Home Sales figures are out in the US.
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UBS Investment Bank