EUR Stays Firm
EUR came under pressure on Friday morning in New York after sources from the ECB announced that the central bank will await the German constitutional court ruling on the ESM before finalising its bond-buying programme. This disappointed investors hoping to get the details of the programme at the ECB meeting on September 6. As the court ruling is on September 12, it appears that the markets will now have to wait till the next central bank meeting on October 4. Spanish government bonds which came under selling pressure found some support from news reports that the ECB is considering setting yield band targets as “one of the options” for its bond-buying programme. Reuters quoted an ECB official as saying that this is “the most likely approach, and also the one that could be most successful”. EURUSD bounced back to stay above 1.25. Greek Prime Minister Samaras had meetings with German Chancellor Merkel on Friday and French President Hollande on Saturday. Both Merkel and Hollande said Greece “must remain part of the Eurozone” but maintained that a decision on further aid can be made only after the Troika’s report. From Samaras’ meetings last week, it appears that the risks of a Greek exit have subsided which should support EUR in the near term. Elsewhere, the Fed released a letter from Chairman Bernanke to a Republican Congressman, defending the central bank’s policy actions and noting that there is “scope for further action” should the Fed deem as necessary “after weighing the cost and benefits”. Though this stance is not new, it increased market’s expectations of further stimulus in September – in the backdrop of last week’s FOMC minutes. Bernanke’s annual speech at the Jackson Hole is expected to offer some clues on the Fed’s next policy move on September 13. But as noted in our latest FX Comment (“Trading Jackson Hole”), FX investors should not expect complete clarity on August 31 and we therefore see value in owning short-dated vol (1w or 2w) in USDJPY over this period. On the data front, US durable goods orders rose by 4.2% m/m in July beating consensus of 2.5% but the orders excluding transportation declined 0.4% m/m against consensus of +0.5%.
Click here to read the full report: UBS Morning Adviser Asia
UBS Investment Bank