Some Respite For The Euro
No news is good news. That pretty much summed up the story for the euro overnight, as the lack of any major political headlines or data releases set the stage for EURUSD short covering amid hopes that a pan-European roadmap towards a banking union would emerge in coming weeks. Gains in Spanish and Italian equity markets – not to mention a scheduled G7 conference call on Tuesday to discuss the Eurozone crisis – were also euro-supportive even though the G7 call was later deemed to be part of “regular’ talks. Merkel and Barroso said EU banking supervision will be “discussed” at the next EU Summit, but specifics were predictably lacking. While S&P published a report ascribing a one-in-three chance of Greece exiting the euro, there was little market reaction, with concerns about adverse spillover effects tempered by S&P’s assertion “that other sovereigns would be unlikely to follow any Greek exit”. GBPUSD brushed off the UK ratings downgrade by Egan-Jones to AA- from AA in thin conditions exacerbated by the UK holiday. Danmarks Nationalbank confirmed that reserves rose to a record high of DKK502.4 bn in May, with FX intervention amounting to DKK29.6 bn, the heaviest tally since May 2010. As for the SNB, the latest sight deposit data showed an increase of about CHF34 bn during the last few weeks, on the low side of market expectations, but this may be distorted by FX swap operations. Thursday’s May reserve number will provide a clearer indication of the degree of SNB activity. Today’s second-tier US data were soft (May New York ISM down to 49.9 in May; April factory orders down 0.6% m/m), but failed to move USDJPY in a market already looking ahead to Thursday’s Bernanke testimony. USDJPY bears are also leery of rate checks or covert intervention by the Japanese authorities, with Japan’s Vice Finance Minister Nakao noting an exchange of views with BoJ Executive Director Nakaso today. The focus is now on the RBA; UBS and the consensus expect a 25bp cut, yet a 50bp move cannot be ruled out. This should be followed by a ‘no change’ verdict by the BoC.
Click here to read the full report: UBS Morning Adviser Asia
UBS Investment Bank