The Slide Continues
The cautious tone to markets continued on Wednesday with the dollar and yen continuing their rise. The absence of major data releases in Europe and Asia means market focus remains on the risks emanating from Greece’s new political landscape and media coverage of ‘break-up’ risks has increased dramatically. While we maintain our view that the costs associated with a Greek exit are very large and wider political sentiment is anti-austerity rather than anti-euro, market focus remains centered on this. European bond spreads have continued to widen, while the euro remains under pressure. The news wires were generally quiet, the euro dropped around 15 pips after German government sources said that the parliamentary vote on the ESM and fiscal compact is not due until at least mid-June. A further leg lower came when the Troika announced they have cancelled the May mission to Greece, though this had been hinted at yesterday. The Australian and New Zealand dollars continue to weaken too as FX volatility rises and global risk appetite falls. A Reuters report pointing to increased political uncertainty in China did nothing to steady investor nerves either, and triggered further selling of both currencies. The report indicated China’s five-year congress could be delayed by a few months to allow time to debate the size and composition of the politburo. With Australia’s budget announcement having cemented the tighter fiscal-looser monetary policy regime shift, the Australian dollar is also likely to remain particularly sensitive to any weak data prints that will magnify the potential for RBA easing. However, the focus remains very much on the postelection political events in Greece, where SYRIZA leader Alexis Tsipras stirred things up by warning that “the popular verdict clearly renders the bailout deal null”. He added that banks should come under state control and called for an international commission to investigate whether Greece’s debt is “legal”. It remains to be seen if Tsipras will be any more successful than New Democracy head Antonis Samaras in his attempt to form a new coalition government. Given the backdrop, the yen should have more scope to probe the upside.
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UBS Investment Bank