Euro Fear
The euro continues to look vulnerable, with EURUSD having tested sub-1.21 levels in the face of a further jump in peripheral bond yields amid a slew of worrisome headlines since the weekend. Indeed, Spanish 10yr bond yields seem to be finding a home above 7%, with press reports suggesting that more regions beyond Valencia may have to seek financial aid from the central government – reinforcing the risk that Spain may have to request a full EU/IMF bailout despite continued denials from Spanish officials. Then there is Greece, where the potential for nasty headlines remains high given the impending Troika review. Already, markets have seen (i) Germany’s Vice-Chancellor claim that the notion of a Greek exit had “lost” its fear factor; (ii) press reports suggesting the IMF has told the European Commission that it cannot provide any further funding for Greece; (iii) Prime Minister Samaras warn that the Greek economy is now in a full depression; and (iv) SYRIZA head Alexis Tsipras claim “this austerity plan leads the country to bankruptcy, closer to a Euro exit”. The deterioration in the Eurozone consumer confidence index to -21.6 in July from -19.8 in June certainly did not help matters in the wake of ECB President Draghi’s earlier admission that inflationary pressures are falling faster than was expected – a clear signal in our view that another rate cut is on the cards by September. However, the euro managed to regain its composure after the initial slide, helped by the IMF’s contention that it “is supporting Greece in overcoming its economic difficulties” in an effort to defuse the earlier press reports saying that IMF funding would be cut off. The euro also found comfort in Russian President Putin’s assertion that Russia has no plans to reduce the euro weighting in its reserves, though the overall tone in FX markets remains nervous heading into China’s flash manufacturing PMI release.
Click here to read the full report: UBS Morning Adviser Asia
UBS Investment Bank