Dollar Extends Rally
The economic data flow from the US remained on the soft side, with jobless claims printing 387k to push the four-week moving average to 386k (the highest since December 2011), May existing home sales falling 1.5% m/m, and the June Philadelphia Fed manufacturing index plunging to -16.6 from -5.8 in May. With the ‘no QE’ hangover persisting after yesterday’s FOMC meeting, US equities sold off, with the S&P losing 2.2%. The US dollar rallied against its peers as investors shunned risk. Even USDJPY gained on market speculation that the BoJ is likely to announce further easing at its July 11-12 meeting, reinforced by the appointment of two perceived ‘doves’ (Takahide Kiuchi and Takehiro Sato) to the Policy Board. Earlier, sovereign bonds in the Eurozone rallied on reports that the Spanish banks’ stress tests would point to ‘only’ EUR60 bn in capital needs – well below the available EUR100 bn backstop. Later, the results from consultants Oliver Wyman and Roland Berger came in virtually as estimated, with the former showing a capital need of EUR51-62 bn and the latter pointing to EUR51.8 bn under ‘adverse’ scenarios. The stress test results also mentioned that the top three Spanish banks would not be required to raise new capital. GBPUSD received a temporary lift from the stronger than expected 0.9% m/m rise in UK retail sales for May, though this could be due to short-term factors. GBPUSD subsequently lost ground, undermined by dovish comments by the BoE’s Weale, who noted that there was “appreciably more room for further monetary stimulus”. Sentiment was also dampened by expectations that Moody’s will announce ratings downgrade of some big banks in the UK, reflecting the trouble still brewing in the global banking sector.
Click here to read the full report: UBS Morning Adviser Asia
UBS Investment Bank