Euro Resilience
The frustration continues for EUR bears. Indeed, EURUSD remains resilient, having rebounded from its overnight low to levels back over the 1.30 level despite the worrisome post-election headlines emanating from Greece: the Democratic Left Party’s refusal to join any New Democracy/PASOK coalition; renewed comments from the PASOK’s Venizelos that Greece should renegotiate the terms of its bailout; the failure of New Democracy leader Samaras to form a new government, putting the onus on SYRIZA (The Coalition of the Radical Left) head Tsipras, who will meet the Greek President on Tuesday; reminders from the Merkel government that Germany will not radically alter its posture; and warnings from unnamed Greek finance ministry officials that the country may run out of funds by the end of June. To be sure, it would be dangerous to let recent price action obscure the risk of euro-unfriendly outcomes in the end, whether manifest in the form of greater tensions within Greece if the austerity drive continues, a halt in EU/IMF support if a new government tries to renegotiate earlier agreements – or at the extreme, speculation of a Greek exit from the Eurozone. For now, however, EURUSD is drawing support from the lingering threat of further Fed easing that is weighing on the US dollar, heavily skewed market positioning, a recognition that the anti-austerity vote in Greece does not imply an anti-euro vote, and Fitch’s reaffirmation of France’s AAA rating in the wake of Hollande’s victory in France. Renewed risk aversion should ultimately be more evident in general yen strength in the absence of a stronger FX intervention threat, not to mention a more vulnerable Australian dollar. Though AUDUSD moved higher alongside the better tone in equity markets today, the upside should be constrained by the explicitly dovish turn in the monetary policy debate in Australia, amid a highly uncertain environment where banks have independently lifted lending rates, the RBA no longer predicts above-trend growth for end-2013, and fiscal drag promises to be significant. The focus is now on the impending budget announcement in Australia, which should tee up a further tightening of fiscal policy to achieve a 2012-2013 surplus, effectively placing a greater burden on the RBA to support growth. The Australian employment data and Chinese bank lending/export figures due out later this week are unlikely to offer much comfort for the Australian dollar.
Click here to read the full report: UBS Morning Adviser Asia
UBS Investment Bank