Papademos Spooks Euro
A bout of euro selling took place overnight after a newswire headline sensationally claimed that “preparations for a Greece euro exit are being considered” – even citing former Greek Prime Minister Papademos as the source. The full original quotation was far more nuanced however. Indeed Papademos later clarified the comments saying that Greece is not preparing for an exit, and the euro greeted the news with some relief. Risk appetite remains heavy however, with investors receiving little encouragement from the barrage of official jawboning ahead of tonight’s ‘informal’ EU Summit. Any hope for positive surprises on such critical issues as common-issuance eurozone bonds, deposit guarantees and bank recapitalisation options have already been dampened by the uncompromising stance of German officials. The most one can reasonably expect at this stage would be agreement on the broad outlines of a ‘growth compact’ focused heavily on structural supply-side measures that will not be finalised until the subsequent EU Summit on June 28-29. The headlinegrabbers for the moment are ‘project bonds’ and new EIB financing, but these are not sufficiently new or bold to give the euro a significant lift. Indeed, no formal decisions are expected to be unveiled after the summit, which may simply be capped off by a statement from EC President van Rompuy who is likely to confirm general agreement on the ‘growth’ measures. USDJPY fell 30 pips in the wake of the BoJ’s overnight decision to keep policy entirely unchanged. Fitch’s downgrade of Japan yesterday has by now been completely brushed off with USDJPY now back at levels where it traded before yesterday’s ratings action. Bank of England minutes from the May meeting are due with David Miles likely to dissent again on the dovish side. Recent comments by Adam Posen suggest he is having second thoughts about dropping his call for more QE at the April meeting, although it remains to be seen if this translated into a dovish dissent in May. The minutes may also shed some light on why the MPC voted to halt further Gilt purchases despite the quarterly inflation report predicting an undershoot at the 2-3 year forecast horizon.
Click here to read the full report: UBS Morning Adviser Europe
UBS Investment Bank