DXY Bid Ahead Of Summit
The dollar pushed higher overnight, with EURUSD breaking through 1.2650, as expectations fell ahead of today’s ‘informal’ EU summit. In the Asian session, a bout of euro selling took place after a newswire headline sensationally claimed that “preparations for a Greece euro exit are being considered” – even citing former Greek Prime Minister Papademos as the source. The full original quotation was far more nuanced however. Indeed Papademos later clarified the comments saying that Greece is not preparing for an exit Risk appetite remains heavy however, with investors receiving little encouragement from the barrage of official jawboning ahead of tonight’s ‘informal’ EU Summit. Any hope for positive surprises on such critical issues as common-issuance eurozone bonds, deposit guarantees and bank recapitalisation options have already been dampened by the uncompromising stance of German officials. The most one can reasonably expect at this stage would be agreement on the broad outlines of a ‘growth compact’ focused heavily on structural supply-side measures that will not be finalised until the subsequent EU Summit on June 28-29. The headlinegrabbers 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 who is likely to confirm general agreement on the ‘growth’ measures. USDJPY fell 30 pips in the wake of the BoJ’s overnight decision to keep policy entirely unchanged. Fitch’s downgrade of Japan yesterday has by now been completely brushed off with USDJPY now back at levels where it traded before yesterday’s ratings action. The pound came under pressure after the UK May MPC minutes revealed a vote split of 8-1 against more QE (Miles for), but vote was ‘finely balanced’ for several members. Our UK economist notes that the the main reason for not expanding QE in May is the inflation overshoot. Many more reasons were offered for expanding the QE programme however, such as Eurozone woes, sterling strength and spare capacity. In our view the BoE will hold off from another round of QE unless conditions in the Eurozone deteriorate substantially from here and/or the wholesale bank funding market seizes up again.
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UBS Investment Bank