Waiting Game
FX markets traded in tight ranges as investors waited for fresh guidance ahead of this week’s EU Summit. The ECB’s decision to reduce the ratings threshold for banks’ collateral and the proposal for a ‘growth package’ worth 1% of EU GDP or EUR130 bn out of the Rome meeting of the leaders of Germany, France, Italy and Spain provided a temporary boost for the euro, but the effect quickly faded. The loosening of collateral requirements was well flagged, while the ‘growth package’ was vague, lacking details on content and financing. EURUSD may be underpinned by the risk of more ‘positive’ headlines heading into the EU Summit, as the pressure builds to find some middle ground on such key issues as a banking (or financial) union, ESM options and Eurobills. However, judging by the market’s bearish response to the benign Greek elections and the Spanish bank bailout, there is clear scope for post-Summit disappointment, as we see a low probability of any major breakthroughs. As such, we remain bearish on the euro with our 1m target for EURUSD at 1.24. On the data front, the German IFO business climate index undercut market expectations at 105.3 for June. While the current assessment component surprised to the upside at 113.9 against a consensus of 112.0, the drop in the expectations index to 97.3 in June was sharper than expected. This reinforced concerns that the ongoing crisis is starting to weigh ever more heavily on the German economy; indeed, our Eurozone economics team revised its German GDP growth forecast for 2013 down from 1.9% to 1.1%. Canada’s May CPI figures came in softer than expected at 1.2% y/y overall and 1.8% y/y on a core basis, initially sending USDCAD to session highs before sellers re-emerged. The focus now shifts to Spain’s formal request for bank aid, the troika’s visit to Athens and a scheduled meeting between French President Hollande and the ECB’s Draghi, though conviction may be lacking ahead of the EU Summit. Finally, in our latest trade recommendation, We sell our 8-month (29-Nov-2012 expiry) EURNOK 7.90-strike digital call (which knocked in at 7.50) for 14% EUR payout (we bought at 13%). We roll the structure into a new 8-month 7.90 digital call (28-Feb-13 expiry) with a knock-in at 7.40, costing 13.25% EUR payout. We risk 0.265% to make 2%.
Click here to read the full report: UBS Morning Adviser Asia
UBS Investment Bank