Hope And Confusion
Though EURUSD initially bounced higher on the ECB’s decision to leave rates unchanged and hopes for a bold gesture from Draghi, the sceptics were vindicated in the end. To be sure, Draghi flagged the bond-buying option as many had hoped, but there were certainly no game changers. For starters, Draghi stressed the need for proper sequencing and conditionality – a formal application for assistance via the EFSF/ESM would be a necessary, but not sufficient, condition for ECB action to tame “risk premia that are related to fears of the reversibility of the euro”. Draghi also acknowledged that a rate cut was discussed, and dismissed the prospect of the ECB granting a banking license to the ESM in its current form. Then he added a fresh twist in his description of “new” bond purchases that would be “very different” from the SMP and would focus on the shorter end of the yield curve. Draghi’s inability to clarify whether such purchases would be limited or unlimited, let alone sterilised, simply added to the market confusion. Significantly, Draghi admitted that the Bundesbank’s Weidmann held reservations about such bond buying, casting further doubt over the credibility of the programme even before it starts. Indeed, the mere fact that Germany is not entirely on board is arguably the most euronegative aspect of the ECB debate. The evasive responses by Italian Prime Minister Monti and his Spanish counterpart Rajoy on the question of what conditions would give rise to a formal request for assistance at their joint press conference merely added to the pressure on the euro amid the spike in Spanish and Italian 10-year bond yields – the former back to a 7% handle. The focus now shifts to the US employment data for July, where euro bulls will be hoping for a weak print that re-ignites QE “bets” in the US. Consensus pegs a 100k rise in non-farm payrolls, below the 115k UBS estimate.
Click here to read the full report: UBS Morning Adviser Asia
UBS Investment Bank