Yen Retreats
JPY lost ground against its peers as positive data surprises in the US and Eurozone strengthened risk appetite. US retail sales grew by 0.8% m/m in July, the first gain in four months, beating expectations of a 0.3% increase. Gains were broadly based across sectors, weakening the case for the Fed to embrace QE in September. In fact, in the wake of firmer US data in recent weeks, we do not expect the Fed to reactivate its QE programme next month. Risk assets were earlier supported by better than expected Q2 GDP data from Germany, France, and the Netherlands. Eurozone Q2 GDP, however, contracted by 0.2% q/q, as expected, pulled down by negative growth in Spain and Italy. EURUSD relinquished its early gains following the weak German ZEW Survey Economic Sentiment index, which fell to -25.5 (consensus: -19.3) in August from -19.6 in July. According to the ZEW, the decline in its indicator signaled that analysts expected the German economy to slow over the next six months, with the export sector particularly affected. Greece successfully auctioned EUR4.0625 bn of 91-day T-bills at 4.43% with a bid-to-cover ratio of 1.36. The auction is the biggest in two years, and should help the government pay back the EUR3.1 bn due on August 20. Spanish Prime Minister Rajoy stuck to his stance that Spain would not request a bailout until more details of the new bond-buying plans of the ECB are known. The lack of fresh developments on the policy and political fronts in the Eurozone should keep EURUSD range-bound for now. But with the Eurogroup and the ECB meetings scheduled in the first week of September, and with German Chancellor Merkel and Greek Prime Minister Samaras meeting on August 24, one must be wary of upcoming event risk, which could put downward pressure on EUR. Our 1m EURUSD target remains 1.20. Ahead today, the minutes of the BoE’s August meeting are due. We expect a unanimous decision on both rates and the asset purchase programme. Also on tap is the US CPI report for July. Our economists estimate that the overall CPI in July rose by 0.3% m/m, driven by higher food and energy prices. A higher than expected CPI print could lower market expectations of another Fed QE programme at the margin in the wake of the firm retail sales data – to the benefit of USD.
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UBS Investment Bank