RBNZ Expected To Hold
FX markets traded in tight ranges overnight ahead of Greece’s weekend election. USDJPY nudged a little 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. In Europe, Spanish sovereign bonds continued to weaken on Tuesday. The 10y yield set a new euro-lifetime high and ultimately rose 19 bp on the day. Sovereign bonds in Italy, France and even Germany also fell quite sharply – while we would caution against over-interpreting a single day’s price action, this could be a sign that investors are now beginning to price in one of two possibilities: either a systemic escalation of the crisis that threatens the entire Eurozone, or a concerted policy response that ultimately sees fiscally-strong Eurozone countries stand behind the weak. Given global equity markets have closed in positive territory, the latter view appears to be gaining traction for now. In customary fashion, Fitch followed up last week’s three-notch downgrade of the Spanish sovereign by also cutting the long term ratings of 18 Spanish banks. The euro dropped on the headline but quickly recovered. Germany stuck to its long-standing position ruling out the introduction of commonly-issued Eurozone bonds anytime soon. Elsewhere, the UK manufacturing data for April was quite soft, with production falling -0.7% m/m (prior: +0.9%, cons: -0.1%). Our economics team notes that the data echoes similar weak outturns in most EU countries, suggesting that the slowdown is widespread and to some extent, export-driven. We believe downside risks to EURUSD will continue to dominate and that any respite for risk currencies will be short lived. We also believe that the Fed will not announce another round of QE at next week’s FOMC meeting unless conditions in the Eurozone deteriorate rapidly and spillover into global financial markets.
Click here to read the full report: UBS Morning Adviser Europe
UBS Investment Bank