Euro Rally Reverses
The euro gave back all its gains following the Greek elections as investors turned their attention to Spain. The Bank of Spain reported that deposits in the Spanish banking sector dropped by 2.52% in April from March and the bad loans ratio rose to 8.72%. Spanish 10y yields traded above 7.15%, a euro-era record, as investors look ahead to Thursday’s auction – the first since Spain requested external assistance to help recapitalize its banking sector. In Greece, Antonis Samaras, leader of New Democracy is in talks with his counterparts in SYRIZA and PASOK to build a coalition government. PASOK party leader Venizelos has already indicated that he will not join a government unless it includes SYRIZA, while SYRIZA party leader Tsipras has already made it clear his party has no intention of joining a coalition government. Such incompatible positions suggest some tough and potentially protracted negotiations still lie ahead, and while a new government is likely to emerge eventually, its longevity remains in question. Minutes are due from the RBA’s June 5 policy meeting at which the cash rate was cut 25bp. Currently the rates market has 100 bp of additional easing priced in over the next 12m but we would not be surprised if the bank refrained from giving much in the way of forward guidance – especially given the enormous international uncertainties out there, not to mention somewhat contradictory economic dataflow domestically. Today, the Bank of England is due to announce the size of the inaugural auction of its Extended
Collateral Term Liquidity Facility which is due to take place on Wednesday. With investors currently inclined to reward the currencies of proactive central banks, any auction size greater than GBP 5 bn could eventually trigger some sterling upside.
Click here to read the full report: UBS Morning Adviser Asia
UBS Investment Bank