Euro Pushes Higher
Risk currencies continued to grind higher in the European session. With core fixed income selling off and equity markets on a reasonable footing, the euro pushed up towards 1.2550. An article in El Mundo citing sources close to the negotiations suggested the EU’s loan to Spain will be 15y in maturity, with a 3% coupon and 5-year grace period, meaning that no payments will be due until 2017. Spanish CDS tightened throughout the morning while periphery spreads to bunds were also slightly tighter. Dow Jones reports citing “sources” that the Bundesbank is mulling buying Australian dollars. Note that German reserves are about $39 bn. A major allocation into AUD, say 10% – very high by global standards – would be less than $4 bn AUD, and the government bond market is already oversaturated in terms of foreign holdings so we question whether the impact would be hugely significant. USDJPY continued to nudge higher, and we would not be surprised to see some minor further upside ahead of the BoJ’s policy announcement on Friday. The RBNZ’s policy decision later tonight is not expected to produce any rate adjustment, but downward revisions to growth and inflation forecasts seem likely.
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UBS Investment Bank