AUD Continues To Shine
EURUSD has managed to shake off the effects of the weak Spanish bond auction, but conviction is clearly lacking in a market facing a relatively light events calendar. Though widely expected, euro bulls were at least able to breathe a sigh of relief on the approval of the Spanish bailout package in the Lower House of Germany’s parliament by a comfortable margin – 473 votes in favour, versus 97 votes against and 13 abstentions – well beyond the simple majority that Merkel needed. While 22 lawmakers from her own coalition voted against the deal and one abstained, the tally was slightly less than the 26 coalition members who opposed the ESM/fiscal compact parliamentary vote on June 29. Fitch also affirmed Italy’s ‘A-‘ sovereign rating (negative outlook), given its approach “to look beyond current economic and financial conditions and take into account recent and prospective structural reforms that would enhance the growth potential of the economy as well as its assessment that debt stabilisation and reduction is within reach”. Nonetheless, risks clearly remain. Indeed, we believe Spain will ultimately have to request a full-fledged Troika programme and that the ESM/EFSF and/or ECB will have to intervene. Earlier press reports that Spain may be allowed to tap any unused portion of the EUR100 bn bank bailout facility to purchase its own government bonds were subsequently dismissed by EU officials. Moreover, Finance Minister Schaeuble served reminder that Spain would still be liable for EFSF aid for its banks, and that the Bundestag would still need to approve any EU bank supervision plan. The US dollar did not get any help from today’s generally soft US data, with the Philly Fed current activity index improving to only -12.9 in July and existing home sales defying expectations for a gain by falling 5.4% m/m in June. Initial claims rose 34k to leave the four-week average at 376k for the sample week of the July employment report – down only modestly from 388k in the June report sample week. The Australian dollar remains one of the star performers, with unsubstantiated newswire reports that a reserve manager intends to diversify into Australian assets in Q3 simply adding more fuel to the rally.
Click here to read the full report: UBS Morning Adviser Asia
UBS Investment Bank