Spain Drives Market Sentiment
Intra-day FX volatility spiked on Thursday, with the euro bouncing around a 60-pip range. The main catalyst for the move, which also drove other currencies was a series of headlines regarding Spain. The euro initially dropped after a weak Spanish auction. While the amounts allocated were at the top end of guidance, this was largely a function of strong domestic demand and tail on the auction increased substantially. We believe that Spanish auction will keep weighing on bond markets, supporting our view that Spain will have to request a full-fledged troika programme and that the ESM/EFSF and/or ECB will have to intervene to try and keep the country in the market. The euro reversed its losses however when Dow Jones reported that the draft MoU suggests that the EFSF will have two facilities for bond buys and will be able to buy Spain bonds on primary and secondary market. This would be a new development (and differs from the ECB’s SMP program, which only intervenes on the secondary markets). However, Bloomberg then reported the EU Commission as saying that aid is meant only for Spanish banks and not for any other purpose. This would seem to contradict the previous headlines, but it seems clear that there is a push for the EFSF to become active in bond buying in some form. Elsewhere, soft UK retail sales (up just 0.1% m/m and +1.6% y/y against forecasts for +0.6% m/m and +2.3% y/y) briefly put GBP under pressure, though the wider market move saw Cable reverse the move later in the session. The main outperformer on Thursday was the AUD, largely on the back of some respectable Q2 earnings reports which helped to boost US equities. An unsubstantiated newswire headline supplied some further momentum claiming that a reserve manager intends to diversify into Australian assets in Q3.
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UBS Investment Bank