BoE Inflation Report Due
Equity markets continue to provide a support base for risk, with better-than-expected earnings reports in the US limiting the selling for higher-beta currencies. S&P revised its Greece outlook to negative while affirming the CCC rating. The ratings agency projected GDP to contract by 10% during 2012-23, 6 percentage points more than the Troika estimates. It also noted that a severe liquidity squeeze in the Greek economy is visible. In a separate announcement, the ratings agency also took actions on 4 Spanish banks. The euro was resilient however and traded in a narrow range of 1.2423-1.2377 in the Asia session. Japan posted a record trade deficit of JPY 2.5 trn for the first 2 quarters of the year, driven by soft exports. While this development is on the margin JPY negative, the evaporation of the trade surplus is more than compensated by the overall positive international investment position of the country, which will take a long time to reverse. Heading into the BoJ’s two-day meeting, we expect the BoJ to keep its policy effectively unchanged to the disappointment of the doves. The central bank could undertake a few fine-tuning operations, which would not have a material impact on the currency. Yesterday’s economic data in Germany was very weak- where factory orders in June dropped by 1.7% m/m – and in Italy, which saw Q2 GDP contract by 2.5% y/y. Risk was also somewhat supported by dovish, yet familiar, comments from Boston Fed President Eric Rosengren, who called for “a much more accommodative policy”. Rosengren, a non-voting FOMC member this year, recommended an open-ended QE policy focusing on MBS. Fed Chairman Bernanke, in his prepared statement, did not discuss monetary policy. However, he noted that the US economy is still in a “fragile recovery” phase, but is “well placed” for the future. We do not expect the Fed to undertake a fully-fledged QE in September; rather we believe the Fed will opt for the discount window lending option. This is unlikely to have a material ‘debasement’ effect on the dollar. Data in Canada continued to be positive, with the Ivey PMI in July printing a strong 62.8, beating the consensus estimate of 52.0. Ahead today, BoC Governor Carney is due to speak in the UK. Also on tap will be the BoE’s quarterly Inflation Report. Given the string of weak economic data in recent weeks, we expect the central bank to revise its GDP and inflation forecasts downward.
Click here to read the full report: UBS Morning Adviser Europe
UBS Investment Bank