Spain Downgraded Overnight
The RBNZ kept the benchmark rate unchanged at 2.5%. Governor Bollard said it is appropriate for policy to remain stimulatory given the weaker economic outlook, but the policy statement dropped the reference to NZD being overvalued. This lowers the risk of a future OCR cut – after all, the previous policy statement stated that if the currency remained strong then Bollard would need to “reassess the outlook for monetary policy settings”. Earlier, a pair of Spanish sovereign ratings downgrades from two separate ratings agencies triggered a round of moderate euro selling, and sent EURUSD back below 1.26. Moody’s cut Spain three notches to Baa3 – just one notch above junk status. Moody’s sees a risk that more aid may be requested and the rating remains on review for further downgrades. Egan-Jones cut Spain’s rating to CCC+, sending it even deeper into junk territory. Meanwhile Eurozone bond markets remain under stress as the sovereign yields continue to rise – not just in the periphery but also in France and Germany. Wednesday’s Italian treasury bill auctions met with good demand but, naturally, primary market yields were considerably higher than those the government paid a month ago. Newswire reports indicated that deposit withdrawals from Greek banks continue at a worrying pace ahead of the Greek elections this weekend. There seems little prospect of a concerted policy response before leaders next meet at the June 28-29 EU summit, although the German press have already suggested that a third bailout of Greece is in the pipeline. We remain bearish on the euro and keep our EURUSD targets for 3m at 1.20 and 12m at 1.15. In the US, the data remained weak with retail sales dropping 0.2% m/m in May. Today, SNB’s monetary policy assessment is due – we do not expect the policy board to waver in its commitment to defend the floor in EURCHF.
Click here to read the full report: UBS Morning Adviser Europe
UBS Investment Bank