Euro Squeezes Higher
Investors took heart from a pair of news reports, allowing both the euro and the Australian dollar to squeeze 80 pips higher overnight. First, five weekend opinion polls in Greece showed the pro-bailout New Democracy party has nudged ahead of the anti-bailout SYRIZA. The margin is still small however and even an eventual victory for New Democracy may not produce a pro-bailout government. A New Democracy-PASOK ruling coalition might emerge of course, but even then further negotiations will still be needed to bring the existing bailout programme back on track, underscoring the potential for a prolonged standoff with the EU/IMF along with a temporary suspension of payments. Second, an article in the Financial Times also contributed to a more constructive mood, suggesting Spain may have found a novel way to recapitalize its banks without having to auction fresh debt. Instead the plan is to issue sovereign debt directly to undercapitalized banks in the hope that the ECB will offer cash in exchange when these new bonds are pledged as collateral at ECB refinancing operations. This mimics an arrangement already used by Ireland to recapitalize its banking system. IMM positioning data also boosted risk currencies overnight – net long USD, net short EUR, and net short AUD positions are at all-time highs which convinced many that a positioning squeeze could be imminent. The lack of followthrough in EURUSD on the break of 1.25 on Friday also suggests short euro positioning is now very extended indeed. Despite the latest investor positivity, we note that all is not well in Europe and we keep our bearish outlook on the euro and on risk currencies in general. On Friday for example, the president of Catalonia – one of Spain’s regions – called on the central government to support the region’s debt as it is running out of debt refinancing options. Furthermore, a memo leaked over the weekend indicates that Greece could run out of cash by June 20 – somewhat earlier than previously supposed. Meanwhile the SNB is no mood to take chances. SNB President Jordan indicated that planning is underway in Switzerland to help cope with a possible (though unlikely) situation where the Eurozone “falls apart”. Jordan stressed that capital controls could be used to contain CHF strength in this unlikely case, and that the floor in EURCHF would be defended “under all circumstances”. Having hit our 3m EURUSD forecast on Friday, we re-iterate our year-end forecast of 1.15. With the US on holiday today, the economic data calendar is especially thin. Non farm payrolls due on Friday will be the highlight this week.
Click here to read the full report: UBS Morning Adviser Europe
UBS Investment Bank