ECB To The Rescue?
Yesterday, it was Nowotny and today it was ECB President Draghi who triggered a short squeeze which vaulted EURUSD beyond the 1.23 level before the rally cooled. Draghi asserted that “to the extent that the size of these sovereign premia hamper the functioning of the monetary policy transmission channel, they come within our mandate. Within our mandate, the ECB is ready to do whatever it takes to preserve the euro”. This re-ignited hopes that the ECB will take further action to address the crisis via a reactivation of the Securities Markets Programme (SMP) or some other measure. The ECB’s Noyer seemed to back up Draghi’s remarks by saying “it is very clear that we will do everything so that the transmission of our monetary policy takes place in the best possible conditions for our economies”. To be sure, there is a risk that the euro bulls get ahead of themselves, as one could argue that Draghi’s comments are not entirely new, the ECB may only be aiming to adjust the collateral eligibility framework for now, and the SMP provides no lasting solution for the problem anyway. However, with the ECB set to meet on August 2 – one day after the FOMC delivers its policy verdict – hopes for bolder action from Draghi will remain elevated in the interim. Today’s US data did little to temper the perceived risk of further Fed easing as early as next week. The 35k drop in initial claims could not be taken at face value given the volatility associated with the irregular timing of manufacturers’ annual retooling-related shutdowns. The 1.6% m/m rise in June durable goods orders topped the consensus, but the ex-transportation (-1.1%) and ‘core’ capex (-1.4%) components disappointed. Moreover, the June pending home sales index dipped 1.4% m/m. A soft US Q2 GDP print – UBS is expecting 1.5% vs the 1.4% consensus – could further undermine the US dollar.
Click here to read the full report: UBS Morning Adviser Asia
UBS Investment Bank