Sentiment Still Vulnerable
Nervous trading seems set to continue, with the drop in EURUSD below the 1.25 level on Friday highlighting the continued vulnerability of the euro amid the continued absence of any concrete policy initiatives. Any optimism generated by wire reports of a June 13 meeting of German government and opposition members to discuss a ‘European redemption fund’ was diluted by the sheer uncertainty regarding the specifics and the overriding sense that the hurdles will be too high. Statements from Belgian Foreign Minister Reynders on Friday that “there is no organised discussion at the European level along the lines of what do we do” if Greece leaves, kept the euro on the back foot. EURUSD selling intensified on wire reports that Spain’s Catalonia region is running out of debt financing options and needs government help, citing comments from the region’s President Artur Mas. Though not entirely surprising, this effectively served reminder that the risks are not confined to Greece. S&P later followed up with ratings downgrades for 5 Spanish banks, in the context of its broader macro view that Spain is entering a double-dip recession. Sentiment was further undermined by Dutch PM Rutte’s assertion that his country will continue to oppose Eurobonds, even if Germany changed its stance, which he believed was unlikely in any event. Though EURUSD has since managed to claw its way back over 1.25, it is difficult to envision a sustained recovery so long as the Greek election outcome on June 17 remains such a close call, as telegraphed by the latest public opinion polls. One could expect a EURUSD relief rally should the New Democracy- PASOK form a ruling coalition, but even here, it is important to stress that further negotiations will still be necessary to bring the existing bailout programme back on track, underscoring the potential for a prolonged standoff with the EU/IMF. US data again took a back seat to European headlines, though dollar bulls could seek further comfort from the biggerthan- expected rise in the University of Michigan index of consumer sentiment to 79.3 in May – the highest reading since October 2007 and the ninth straight monthly rise, helped by lower gasoline prices. The US Treasury’s semi-annual currency report did not designate China as a currency manipulator, though it did pointedly note that “the RMB remains significantly undervalued and we believe further appreciation of the RMB against the dollar and other major currencies is warranted”.
Click here to read the full report: UBS Morning Adviser Asia
UBS Investment Bank