Euro Consolidates
Some supportive growth data in the Eurozone stabilized FX markets on Tuesday, with the euro pushing back slightly to 1.2850. The Eurozone avoided a technical recession, with Q1 numbers showing the economy flat-lined on a q/q basis. Regional figures highlight the structural problems inside the Eurozone, however; Italian GDP came in below expectations, falling by 0.8 q/q, -1.3 y/y vs consensus for -0.7 and -1.2, and down from -0.7 and -0.4 in Q4. However, German GDP rose 1.7% versus 0.9% cons. The pound came under pressure after slightly soft trade numbers. The March goods traded deficit was GBP8.56 bn vs consensus estimates of GBP8.4 bn. Speaking after last nights Moody’s downgrade of Italian banks, the Italian banking association chief urged the ECB to ignore the downgrade while deciding on matters pertaining to local banks. Elsewhere, political negotiations are set to continue on Tuesday, with SYRIZA confirming its attendance – sustaining slim hopes that a coalition can still be forged, an outcome that might offer temporary relief for the euro. Yet there does not appear to be a lot of scope for policy compromises going forward, with SYRIZA already rejecting the President’s proposal for a government of technocrats. Furthermore, SYRIZA’s staunch opposition to the current bailout agreement suggests that even in the unlikely event that a June election can be avoided, there may still be a showdown with the EU/IMF. We lowered our AUDUSD forecasts overnight, taking the 1m down to 1.00 (prev. 1.05) and the 3m to 0.97 (prev. 1.00). The lower currency forecast profile reflects downgraded UBS China growth forecasts as well as our anticipation that risk aversion is likely rise further on the back of continued political paralysis in Greece.
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UBS Investment Bank