Walking The Walk?
In the absence of any fresh incentives ahead of this week’s key events, EURUSD and the euro crosses remained heavy. Certainly, the euro bulls are still hoping for a bolder policy response from the ECB and/or more reassuring comments from Draghi on Thursday that would formally endorse the reactivation of the SMP, possibly in tandem with purchases by the EFSF in the primary markets further down the road. Yet, press reports since the weekend have highlighted the potential backlash from Draghi’s headline-grabbing comments last week. Indeed, a Der Spiegel story provided more colour on the apparent divide at the ECB on the contentious issue of bond purchases, suggesting that Draghi “has created discord within the Bank’s Governing Council”, on the premise that some members were genuinely caught off guard by his comments and “many oppose plans to buy up sovereign bonds from troubled Eurozone member states, fearing it could just make things worse”. If anything, market expectations for ECB action have been ramped up to the point where the scope for disappointment is that much higher now. Further weighing on euro sentiment was the warning from ratings agency DBRS that it will cut Italy’s rating by one or more notches by August 22. On the crosses, EURSEK is sharply lower on the day in the wake of the stronger than expected Q2 GDP print in Sweden (+1.4% q/q), which was driven by a resurgence in consumer demand – adding more fuel to a currency still feeding off expectations of further diversification flows. EURJPY is looking soft heading into the upcoming barrage of Japanese data, including the July PMI.
Click here to read the full report: UBS Morning Adviser Asia
UBS Investment Bank