German Court Ruling In Focus
USD was weak across the board during the New York session, as risk appetite remained steady heading into the FOMC decision on Thursday. Investors continued to unwind their EUR short positions pushing EURUSD above the 200-day moving average of 1.2835. Germany’s Constitutional Court rules on the validity of the ESM ahead today. A positive ruling will clear the way for the EUR500 bn bailout fund to get formal German approval. This could prompt a short-term EUR relief bounce, but given that markets seem to be already expecting a benign ruling, the focus will be on what the Court says about further integration steps – scrutiny over various details could weigh on EUR. ECB Executive Board member Asmussen acknowledged the SMP programme did not stabilise the markets in an effective way and added that the OMT scheme’s conditionality will “ensure long-term sustainability”. Nonetheless, he served reminder that the new programme is no substitute for structural reforms. Speaking on the ECB’s role as a bank supervisor, Asmussen noted that the monetary policy and supervisory responsibilities of the central bank must be separated. He added that the ECB should start by supervising only the systematically-important banks, noting “anything more is nether feasible nor desirable at the beginning of 2013”. The European Commission is due to present proposals for a single banking supervision mechanism in the Eurozone ahead today following EC President Barroso’s State of the Union Address in the European Parliament. News reports suggest that Barroso will focus on the banking union in his address. Elsewhere, the RBNZ will have its policy meeting later today – we expect no change in the benchmark cash rate of 2.5%. Also on deck is the Dutch election. The latest polls show Prime Minister Rutte’s Liberal Party and the Labour Party running neck-and-neck, albeit well short of a majority. The large pool of undecided voters suggests that the risk of a more EUR-negative outcome cannot be dismissed, as any coalition government including either the far-left (anti-austerity) Socialist Party or the far-right (anti-euro) Freedom Party could foster heightened uncertainty over the future integration steps in the Eurozone.
Click here to read the full report: UBS Morning Adviser Asia
UBS Investment Bank