EUR Rallies
Risk was supported by positive commentary from the Eurozone officials. German lawmaker and the ruling CDU party’s budget spokesman, Barthle, said “small concessions” are possible for Greece. He added that such options as adjusting the interest and maturity of Greek loans must fall within the existing programme to be able to pass in the Bundestag. The German member of the ECB’s Executive Board, Jorg Asmussen, signaled full support to Draghi’s bond-buying programme, noting that purchases may be “unlimited” in scale to price out the “convertibility risk” of a Eurozone break-up. Asmussen’s support was a shot in the arm to the ECB’s bond-buying programme, which was earlier criticised by the German Bundesbank as entailing “substantial risks” to the ECB’s balance sheet. EUR firmed across the board, with EURSEK and EURNOK seeing some short-covering. Spanish 10y yields traded at 6.15% during NY hours, registering a 125bp drop in a month. The flipside of this good run could be to give Spain less incentive to make a formal bailout request and thus delay the ECB’s bond-purchase plan, which could eventually put pressure back on peripheral bond markets. With EURUSD 1m implied volatility still trading at suppressed levels, we suspect that the markets may be too complacent heading into the Eurogroup and the ECB meetings in September. Meanwhile in the US, the Atlanta Fed President, Dennis Lockhart, cautioned against employing monetary policy “too aggressively” to address economic problems that can be resolved “only” by fiscal reforms. Lockhart, a FOMC voting member this year, said US economic data have been “a little firmer” since he last expressed support for more Fed action. We do not expect the Fed to announce another round of QE in September. If the Fed were to deliver more easing, it is more likely to take the form of a discount window scheme to support bank lending activity – less USD-negative than a full QE programme. Our rates strategy team sees scope for UST yields to ease in September, underlining our view that USDJPY is more likely to range trade than break significantly higher from here. Our 1m USDJPY target stays at 78. Ahead today, the Fed minutes are due, but they are unlikely to offer much in the way of fresh guidance. Also on tap today are the Canadian retail sales report for June and Bank of Canada Governor Carney’s speech.
Click here to read the full report: UBS Morning Adviser Asia
UBS Investment Bank