Spain Takes Centre-Stage
Price action overnight was dominated by weaker-than-expected Australian retail sales which pushed AUDUSD back below 0.98. The miss also tripped up the euro, sending EURUSD down to a new 2-year low of 1.2458. Risk appetite was also hit after the Financial Times reported that the ECB has rejected Spain’s plan to finance the recapitalisation of its banking sector via the direct injection of sovereign bonds. The article was published just before the New York close, and we would not be surprised if the euro sees further downside on the back of it. Yesterday’s ratings downgrade of Spain by Egan-Jones from BB- to B was unsettling too, and serves as a reminder of the heightened market sensitivity to any bearish Spanish headlines. This marked the third downgrade in May alone by Egan-Jones, a small private ratings agency, amid concerns about the country’s deteriorating public finances and unresolved banking sector problems. Taking problems in Greece and Spain in combination, risks would still seem to be heavily skewed against the euro. Wire reports that Bank of Spain Governor Ordonez will leave his post one month early (on June 10 instead of July 12) did not help sentiment in a nervous market still hoping for a bolder policy response, especially in the wake of the 9.8% y/y drop in April retail sales (extending the negative streak to 22 months) and a Bank of Spain report predicting the economy will continue shrinking at least through June. US data were predictably overshadowed by the headlines out of Europe, but there was little support for the growth bulls, as the Conference Board consumer confidence index fell to 64.9 in May, the lowest level since January. The Dallas Fed manufacturing index fell to -5.1 in May from -3.4 in April. USDJPY was largely unaffected, however, with many already looking ahead to Friday’s US employment report for May. Our forecasts are +175k for non-farm payrolls and 8.0% for the jobless rate.
Click here to read the full report: UBS Morning Adviser Europe
UBS Investment Bank