Rhetoric Supportive, Data Not
Trading was generally subdued overnight due to a market holiday in London, but the euro still managed to make some headway despite a weak IFO release. Meanwhile, the French and German finance ministers met to continue discussions on the Eurozone crisis. We doubt commentary from the two countries up ahead would deviate materially from the statements in the wake of Greek PM Samaras’ European tour, and the focus up ahead will still be on resolving some of the more structural issues within the Eurozone. German Finance Minister Schaeuble said that France and Germany would start a working group to make joint proposals on Eurozone issues like the banking and fiscal union, but in the short term growth policies may also need to feature in the wake of disappointing data. In other news, over the weekend, Der Spiegel reported that Germany’s Chancellor Merkel wants to draw up a new EU Treaty, and hopes – by December – to have agreed on a date for setting up an EU convention to examine the issue. If confirmed, we believe investors would likely see this as a long term euro-positive, given it would credibly demonstrate Germany’s willingness to do whatever it takes to keep the euro project intact. Overnight, risk sentiment was also soft as Chinese stocks fell to the lowest levels in over 40 months on the back of growth fears. Global headwinds may underscore the need for the Fed to act more assertively, and the market anticipates more clarity ahead of Friday’s Jackson Hole speech by Fed Chairman Bernanke. Overnight Fed’s Evans again affirmed his dovish view, urging for ‘open ended bond purchases’ to boost the economy. On Friday, 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 it necessary “after weighing the cost and benefits”. Though this stance is nothing new, it probably raised market expectations of further Fed stimulus in September – especially against the backdrop of the latest FOMC minutes. Ahead today there are no major releases out of the US, and we expect further positioning adjustments heading into Friday and more event risk as September approaches. Overnight EURUSD traded 1.2491-1.2534 and USDJPY 78.64-78.84.
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UBS Investment Bank