More Talk, No Cohesion
EURUSD managed to stabilise at lower levels overnight, with conditions thinned by the UK holiday. The tone remains heavy in the wake of the softer than expected data prints (German services PMI down to 51.8 in May; German factory orders down 1.9% m/m in April; Eurozone retail sales down 1.0% m/m in April), not to mention the absence of any substantive headlines or joint statement from the G7 conference call on the Eurozone crisis. Prior to the call, ‘sources’ suggested that Germany would be pressing a resistant Spain to accept a rescue package and discussions were likely to turn into a “Germany bashing session”, simply reinforcing perceptions that a coordinated approach to the crisis is still lacking. The point to stress is that nothing concrete is likely to be decided until the results of the Greek election are confirmed on June 17, after which the window will open for more hard bargaining ahead of the EU Summit on June 28-29. The sense of urgency to act may be magnified by the risk of Greece hitting a ‘funding wall’ by the end of the month, just around the time of the next IMF review. As expected, the BoC did not follow the RBA’s lead, holding the line on rates at 1.0% and again noting “some modest withdrawal of the present considerable monetary policy stimulus may become appropriate” – albeit on the condition that “the economic expansion continues and the current excess supply in the economy is gradually absorbed”. The Canadian dollar, which rose modestly on the back of the announcement, remains our preferred choice among the commodity currencies, with its Australian counterpart likely to be challenged by the risk of further RBA rate cuts beyond the latest 25bp move. Indeed, our Australian economics team expects a 3.00~3.25% cash rate trough, but acknowledges the risk that negative events in the global economy, or more acute deleveraging pressure in Australia, may require the RBA to take rates below 3%. Moreover, it remains difficult to expect China to do the ‘heavy lifting’. While UBS expects total new bank lending in China to pick up to RMB750 bn in May from RMB682bn in April as part of the government’s growth support policy for investment projects (to be confirmed either this weekend or next Monday), such a figure would probably not be sufficient to materially improve sentiment. USDJPY remains well supported, helped in part by the post-G7 comments from Finance Minister Azumi, who noted Japan’s concerns about the impact of the stronger yen and weaker equities on the economy – implicitly serving reminder of the solo FX intervention threat. At 53.7, the US non-manufacturing ISM print for May also provided a modestly positive surprise on the back of a higher reading for new orders, though the drop in the employment index to its lowest level since November 2011 served as a reminder of the risks ahead.
Click here to read the full report: UBS Morning Adviser Asia
UBS Investment Bank