Euro Relief
After spiking higher on the back of a short squeeze triggered by comments from the ECB’s Nowotny that “there are pro arguments” in favour of granting the ESM a banking license, EURUSD has stalled out in the absence of any fresh drivers. Nowotny’s comments should not be taken entirely at face value, as he was talking from a personal perspective and made it clear that he’s “not aware of specific discussions within the ECB at this point”. We would also note that Draghi has repeatedly rejected the idea, stating in December that the spirit of the Treaty (with respect to rules about state monetary financing) needs to be respected. In the last monthly press conference, he said acting outside of its mandate would destroy its credibility Nonetheless, Nowotny’s remarks stand out as the first time an ECB member has stated explicitly that this could be a policy option, and with Spanish 10yr yields seemingly finding a home above 7% (even after today’s correction lower), markets are looking for any hints of a concession ahead of the August 2 ECB meeting. Adding to the pressure on the authorities are signs of further macro weakness in the core, the latest in the form of Germany’s July IFO survey, which revealed hefty declines in both the current assessment (to 111.6 from 113.9) and expectations (to 95.6 from 97.2) indexes – consistent with our view that the slowdown in the periphery is affecting growth in the core. The UK is also feeling the effects of Eurozone contagion, with the 0.7% q/q contraction in Q2 GDP keeping the pound on the defensive and prompting our UK economics team to call for a 25bp rate cut by the BoE in November. While US new home sales disappointed (-8.4% m/m), USDJPY has remained range-bound ahead of BoJ Governor Shirakawa’s speech.
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