Lower Expectations
The euro remains heavy, receiving little encouragement from the barrage of official jawboning ahead of the ‘informal’ EU Summit. Any hopes for positive surprises on such critical issues as common-issuance eurobonds, deposit guarantees and bank recapitalisation options were dampened by the uncompromising stance of German officials. The most one can reasonably expect at this stage would seem to be agreement on the broad outlines of a ‘growth compact’ focused heavily on structural supply-side measures that will be finalised at the EU Summit on June 28-29. The headline-grabbers for the moment are ‘project bonds’ and new EIB financing, but these are not sufficiently new or bold to give the euro a significant lift. Indeed, no formal decisions are expected to be unveiled after the Summit, which may simply be capped off by a statement from EC President van Rompuy to confirm general agreement on the ‘growth’ measures. USDJPY has edged higher in the wake of Fitch’s downgrade of Japan’s long-term foreign and local currency issuer default ratings to ‘A+’ from ‘AA’ and ‘AA-‘, respectively. While the deteriorating ratings outlook underscores one of the longer-term negatives for the yen, it is not a compelling reason to expect a sustained retreat now. Even Fitch acknowledged that “the Japanese sovereign retains exceptional financing flexibility and can fund itself at low nominal yields”, adding “the Japanese yen is a global reserve currency and exhibits safe haven characteristics”. Today’s mixed US data (April existing home sales up 3.4% m/m; May Richmond Fed manufacturing index down to 4 from 14) had little impact in a market that is looking ahead to the outcome of the BoJ’s Policy Board meeting. Easing speculation has been fanned by recent press reports pointing to a possible cut in the interest rate on reserves, not to mention the two undersubscribed JGB buying operations last week, which have spawned talk of a possible extension of the JGB maturity guidelines in the Asset Purchase Programme (APP). As such, the ‘no change’ verdict that we expect could inspire a short-term USDJPY pullback. Conspicuously absent is any real sense of urgency among the Japanese authorities to take further action at this stage, with USDJPY holding above ‘crisis’ levels and the Q1 GDP print highlighting the resilience of Japan’s economy.
Click here to read the full report: UBS Morning Adviser Asia
UBS Investment Bank