Euro Squeezes Higher
Risk finally found some consolation overnight as European equity markets rallied on the back of some more pleasant news out of the Eurozone. An Italian auction also passed without incident. On the news front, 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. Our flow monitors also suggest that asset managers, though still on the offer, have slowed down their pace of selling in euros, but this would all prove academic if there were material developments which would point to a Eurozone exit by Greece or any other form of financial contagion. With the US on holiday on Monday we expect trading to remain subdued throughout the session, but one morning’s worth of risk on does nothing to change the high risk of negative headlines, as it remains clear Eurozone institutions are far from achieving a comprehensive action plan to deal with exigent risks. 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 reiterate our year-end forecast of 1.15. Looking ahead, non farm payrolls due on Friday will be the highlight this week and several countries in G10 release their GDP figures. Overnight EURUSD traded 1.2561-1.2624 and USDJPY 79.34-79.66.
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UBS Investment Bank