Euro Aversion
After a brief pop higher on the back of the some seemingly positive headlines from the EU Commission, it was all downhill for EURUSD, which fell below 1.24. Indeed, the Commission’s suggestion that direct bank recapitalisations via the ESM might be “envisaged” and the Eurozone should move towards a “banking union” were justifiably treated with a high degree of caution. The Commission often champions pro-integration policies which are ultimately dismissed by the governments of EU states. EURUSD risks would still appear to be skewed to the downside amid fading hopes for any concrete policy action: Spain’s plan to recapitalise its banking sector via the direct injection of sovereign bonds has been flatly rejected by the ECB; Eurobonds are still facing stiff resistance from Germany and the Netherlands; and the political and practical hurdles to any euro-wide bank recapitalisation scheme are significant. No hard policy decisions seem likely ahead of the Greek election on June 17, portending more nervous trading in the interim. The Greek election itself is still too close to call, but the resilient public support for SYRIZA should continue to weigh on the euro. Of the three polls released today, one showed SYRIZA in the lead over the New Democracy (30.0% vs 26.5%), another showed a dead heat (at 24.5%), and the third put the New Democracy on top, albeit by a slim margin (23.4% vs 22.1%). GBPUSD remains under pressure, as BoE data confirmed another month of net outflows from overseas gilt investors and the Bank’s Chief Economist Dale highlighted the risks to the UK economy from the Eurozone crisis. The yen continues to sport a firm profile, with Deputy Governor Yamaguchi’s claim that the domestic economy is in better shape than expected further dampening expectations of bolder BoJ action. Japan’s Vice Finance Minister Nakao served reminder of the intervention threat, reinforcing our view that yen bulls will still have more room to run on the crosses than USDJPY.
Click here to read the full report: UBS Morning Adviser Asia
UBS Investment Bank