Euro Steady At The Lows
The speed and scale of the euro’s decline in recent days has been remarkable. Having reached 1.2693 in the immediate aftermath of the EU-Summit, EURUSD finally steadied overnight after setting a new two-year low of 1.2225. Growing disillusionment with the summit outcome has been a key driver, amid all the uncertainty over what exactly was decided and how soon it can be implemented. The ECB has also played its part by cutting the deposit rate to 0% which undermined the euro’s yield support. Finally, although Friday’s payrolls report was less than spectacular, the soft headline number does not seem weak enough to warrant another round of Fed balance sheet expansion, and EURUSD remained heavy afterwards. US nonfarm payrolls rose just 80k in June, undercutting the 100k consensus. Private payrolls were slightly stronger, up 84k but still below the 110k expected in the market. The details, however, were less disappointing, with average hourly earnings up 0.3% m/m and average weekly hours increasing to 34.5 in June from 34.4. Our economists note that payroll earnings – a product of private payrolls, weekly hours and average earnings – rose 0.7% m/m in June, faster than the 0.3% m/m average in the first five months. We continue to expect job growth to pick up in H2 2012, keeping the Fed away from the QE trigger. Boston Fed President Rosengren however seemed less convinced overnight noting that the latest jobs report is ‘not a positive sign’, and that it would be possible to see additional balance sheet expansion depending on forthcoming data. Rosengren becomes an FOMC voter in January, at the very moment the US is scheduled to experience its ‘fiscal cliff’. Chicago Fed President Evans (also a non-voter this year) recommended that the Fed should take bolder easing steps – preferably by buying MBS. This policy prescription is very much in line with his previous remarks and FX markets did not react. USDJPY has not yet recovered its post-payrolls losses although we do expect the pair to tick gradually higher this week as the BoJ’s policy decision on Thursday draws near. While our Japan economics team still expects the BoJ to expand its Asset Purchase Programme, we believe a JPY5 trn ‘top up’ would have little lasting impact on USDJPY in the absence of a material widening of the 2yr UST-JGB yield spread. FOMC minutes due on Wednesday have the potential to exert an influence too however, especially if a continuation of the maturity extension program is seen as a possible prelude to a resumption of asset purchases. In Europe today, the focus will remain on how Spanish sovereign bonds perform as 10y yields approach 7% once again. German paper too is likely to attract attention for a different reason, given that 2y yields closed inside negative territory on Friday.
Click here to read the full report: UBS Morning Adviser Europe
UBS Investment Bank