EUR Stabilises
EUR continued to grind higher as investors hoped that Spain would request a full EU/IMF bailout, clearing the way for the ECB to buy Spanish bonds in the secondary market. Though we believe that Spain’s request for EU’s aid is all but inevitable, there is no indication that such a request is imminent. The Spanish government maintained that it needs to see the details of the assistance program both from the EFSF and the ECB before making a formal request. In fact, the Spanish Finance Minister, Luis de Guindos echoed Prime Minister Rajoy’s earlier comments, noting that a “precise calendar” can be put only after the details of the aid program are made available. As such, any breakthrough in this regard before the scheduled Eurogroup Ministers meeting on September 3 seems unlikely. The meeting could also shed some light on Italy’s plan of action, as Prime Minister Monti seems more averse than his Spanish counterpart in acknowledging the need for a full EU/IMF bailout. We therefore think that the recent EUR relief rally, triggered by Draghi’s comments last week, could last only for a few days before eventually fading away. The structural problems of the Eurozone are still far from getting resolved as the EU leaders focus on temporary measures to gain more time. A report from the IMF on Monday urging the Eurozone nations to take bigger haircuts on their Greek loans so as to make Greece’s debt “sustainable” is evidence of the impending problems in the common currency region. We therefore stick with our 3m EURUSD target at 1.20. EURCHF meanwhile briefly popped higher though this was attributed to a miss-hit. Ahead today, the RBA policy decision is due. Considering the relatively better domestic data and the lack of material worsening of global economy, we are with consensus in expecting the central bank to hold its benchmark rate at 3.5%. GBP could be vulnerable to a dovish Inflation Report later this week which we believe reinforces our view for a 25bp rate cut when the BoE meets next month. USDJPY remained range-bound, with the Nikkei report that the BoJ is likely to keep its policy unchanged this week limiting the upside.
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UBS Investment Bank