No Delay in ESM Ruling
The euro got a minor bounce overnight as the German Constitutional Court announced that a last-minute attempt to stay the ruling had been rejected, and a decision would be made tomorrow as previously intended. Although the market does not foresee the Karlsruhe court becoming a major issue in crisis resolution, it is a tail risk which needs to be taken into account. However, the key focus remains with the political establishment within the Eurozone, and Spanish Prime Minister Rajoy’s comments overnight confirming no decision had been made on any aid request could prolong the uncertainty. Meanwhile in Europe the Troika’s review of Greece’s bailout programme is still ongoing and our base case scenario sees the EU eventually bringing the Greek bailout programme back on track in time for the Eurogroup meeting on October 8. Otherwise it’s a matter of growth data continuing to feed through amid the lack of event risk today. During Asian hours, data showed lending in China increased by more than expected overnight, giving the Australian dollar (and risk appetite more generally) a temporary boost. Following the ECB’s announcement of the Outright Monetary Transactions (OMT) programme that reduced tail risks in the Eurozone – not to mention the incorporation of a QE announcement by the Fed this week from our US economics team after the weak payrolls data – we revised our shortterm FX forecasts. Our 1m and 3m EURUSD forecasts have been raised to 1.30 (from 1.25) and 1.25 (from 1.20), respectively, but the 12m target remains 1.15. We stress that the majority of our changes were made on a tactical basis, and structurally we still see the euro weakening as factors including growth, outright policy positions and policy differentials will likely weigh on the currency in the medium to longer term. Our asset allocation teams have also assumed a more favourable position on risk as well, but this is also on a tactical basis. Judging by our flow figures, much of the shifts in FX markets over the last few weeks have occurred on a positioning basis only, and much more needs to be done, especially for Europe, to attract real money to once again increase their marginal positioning in the area. Overnight EURUSD traded 1.2755-1.2796 and USDJPY 77.97-78.28.
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UBS Investment Bank