Banking Concerns Weigh on EUR
Media reports that the ECB would halt monetary policy operations with some Greek banks put the euro on the back foot, highlighting the continued scope for unsettling news. Unnamed sources claimed that four Greek banks might be operating with negative equity capital, prompting the ECB to freeze lending to such institutions, which would have to turn to the Bank of Greece for Emergency Liquidity Assistance (ELA) pending recapitalisation. The ECB later confirmed that some Greek banks have indeed been moved to ELA from the main operations, but that the recapitalisation would be finalised “soon” – allowing troubled institutions to return to normal ECB funding channels. Nonetheless, the problems in the Greek banking system (including yesterday’s reports of accelerated deposit withdrawals) reinforce our bearish euro call ahead of the June 17 Greek election. SYRIZA, which still leads in public opinion polls and is likely to figure prominently in any new government, is showing no signs of softening its stance on the current bailout agreement. Indeed, party head Alexis Tsipras called for a freeze on wage/pension cuts and all state asset sales until a new government is installed. And despite hopes for a softening of the ‘austerity approach’ in the Eurozone, any ‘growth initiatives’ will likely entail supply-side reform measures, suggesting that those looking for bolder demand-boosting actions from the fiscal side will be disappointed. EURGBP has managed to retain the bulk of the overnight gains scored on the back of the dovish tone of the BoE’s Inflation Report and Governor King’s comments. While the BoE’s central forecast for inflation was revised higher in the short run as expected, the real surprise came in the form of the downward revision on the crucial 2/3-year horizon. Notwithstanding the disconnect between the BoE’s decision to stand pat and the inflation fan chart, our UK economics team notes that the projected undershoot signifies the readiness of the BoE to expand QE further, particularly if the Eurozone crisis and bank funding pressures intensify. Today’s generally firm US data – April housing starts up to 717k; April industrial production up 1.1% m/m; April capacity utilisation up to 79.2% – were overshadowed by the events in Europe. The FOMC minutes from the April 24-25 meeting offered little support for USDJPY, with the worsening situation in Greece since then already cementing expectations that the Fed will have to keep the QE door open. Ahead, we expect Japan’s Q1 GDP should be solid, but not strong enough to alter the BoJ’s own easing bias or the USDJPY range trade.
Click here to read the full report: UBS Morning Adviser Asia
UBS Investment Bank