Merkel Stands Firm
The yen gained against its peers, as investors avoided risk on downgraded expectations for any substantive output from the EU Summit. Such scepticism was reflected in our latest flow monitor, which showed that our clients continued to add to their short euro positions last week, while overseas investors offloaded a net $2 bn worth of euro-denominated equities – the most since July 2008. Germany remains opposed to any form of debt mutualisation, as Merkel noted that such measures at this juncture would be “wrong and counter-productive”. The ECB’s Weidmann expressed similar concerns, noting that the current proposals for eurobonds, eurobills, and the pooling of risks would only work if member states are willing to give up some sovereignty, an issue that member states receiving EU bailout funds are reluctant to discuss. Press reports indicate that the Summit will “rebuild EMU” and in that spirit, the markets could see grand, headline-grabbing proposals that may look constructive in principle. However, we maintain that risks are skewed towards post-Summit disappointment in the likely absence of any specifics, timing commitments, and hard agreements. Simply put, market fears of bank deposit runs, further ratings downgrades, funding dislocations and even a Greek exit will not be extinguished come June 30. Sentiment was certainly not helped by the formal request for external aid by Cyprus, the resignation of Greece Finance Minister-designate Rapanos, and the downgrading of Spanish banks by Moody’s. Our 1m and 3m targets for EURUSD remain 1.24 and 1.20, respectively. Elsewhere, in the US, new home sales jumped 7.6% m/m in May to an annual rate of 369k, the strongest pace since April 2010, though the muted reaction of USDJPY merely served reminder that the focus is still very much on Eurozone headlines. Ahead today, USDJPY may be more sensitive to the Diet showdown over the consumption tax bill in Japan’s Lower House. If the number of “no” votes exceeds 99, it would imply that more than 54 DPJ members opposed the legislation and may leave the party at the expense of the DPJ’s majority in the Lower House. This will be a key barometer of early election risks in Japan. Also on tap today will be the RBA’s Debelle and a number of BoE speakers.
Click here to read the full report: UBS Morning Adviser Asia
UBS Investment Bank