Seeking Safety In Yen
The downside remains the path of least resistance for the euro, with diminishing hopes of any fresh policy initiatives keeping investors on the defensive as EURUSD tested the waters below 1.22. The risk retreat was reinforced by a number of factors – declines in European equities; concerns about the outlook for Spain in the aftermath of the government’s new austerity measures; the lingering uncertainty over a Greek programme that is well off track; the unconvincing Chinese lending data; the softer than expected Australian employment report; and the BoJ’s unwillingness to expand the size of its Asset Purchase Programme. Indeed, regarding the latter, what really stood out was the lack of any material downgrade in the BoJ’s interim assessment despite all the external headwinds, disappointing those yen bears hoping for a bolder Japanese response. The yen has been the natural winner in an environment where the Japanese institutional appetite for FX risk should remain limited and 2-year JGB yields actually remain positive – above their German counterparts. The steeper than expected 26k drop in US initial jobless claims (which pulled the 4-week moving average down to 376k, down 10k from a week earlier) reflected some seasonal distortions, but the muted USDJPY reaction was testament to the high degree of caution in the market. The spotlight is now on the upcoming barrage of Chinese data, particularly the Q2 GDP report, with the consensus pegging a headline print of 7.7% y/y – down from 8.1% in Q1 and the softest result since Q109. The UBS forecast stands at 7.6% y/y. While our China economics team is looking for the economy to stabilise in the second half, many are still adopting a ‘seeing is believing’ posture.
Click here to read the full report: UBS Morning Adviser Asia
UBS Investment Bank