Dollar Strengthens
Sentiment took a turn for the worse overnight when the Wall Street Journal reported that depositors withdrew EUR 0.7 bn from Greek banks on Monday alone. The dollar continued to strengthen across the board – even against the yen and gold. USDJPY would normally be expected to weaken in such an environment, but it was held aloft by unsubstantiated market speculation that the BoJ may lower the interest it pays on cash balances held at the central bank. Interest is currently paid at 10bp which acts as a floor on JGB yields. If this rate were lowered, front end JGB yields in particular would have room to fall further making future easing more effective. Indeed 2y JGB yields fell below 10 bp overnight for the first time since 2005 suggesting the market may be starting to position for this outcome. Also, the BoJ received insufficient bids when buying JGBs for its Asset Purchase Program overnight, suggesting some market participants would rather keep their front-end JGBs at least until next week’s BoJ policy meeting in case a rate adjustment emerges. Meanwhile in Greece talks to form a new government have been abandoned and an election date (likely June 17) may be announced today when party leaders convene again at 10:00 GMT. Given the continued political uncertainty plus the associated fears of a halt or postponement of external support, a hard default and fears of a euro exit, our negative euro view remains intact. We would expect the negative pressure on the euro to intensify as we get closer to the ‘funding wall’ in Greece, when the financing dries up – widely foreseen around mid-to-late June, coinciding with the impending election. Almost forgotten amid the Greek drama was a reasonably solid batch of US data, which reinforced our ‘no QE’ Fed view and offered some support for USDJPY. The 0.4% m/m rise in April US retail sales excluding autos, gasoline and building materials is consistent with real consumer spending beginning Q2 at an annual rate above 2% including services. Aboveconsensus results were also chalked up for the Empire State manufacturing index and the housing market index. FOMC minutes are due – the last edition of which proved to be USD supportive.
Click here to read the full report: UBS Morning Adviser Europe
UBS Investment Bank