EUR Resilient
On a day of limited data releases, EUR came under selling pressure in the early hours of NY trading after the ECB refuted the Der Spiegel report that the central bank plans to set a cap on sovereign yields. The Bundesbank, in its August monthly report, noted that it views government bond purchases by the ECB “critically” as they entail “substantial stability policy risks”, disappointing those hoping for an open-ended securities purchase programme by the ECB. Nevertheless, the Spanish 10y yield dropped 16bp to 6.2% and EUR squeezed higher, as risk-sentiment improved. Greece is back on investors’ radar with the German foreign minister, Westerwelle, meeting his Greek counterpart, Avramopoulos, in Berlin on Monday. Westerwelle noted that a decision on extending further aid to Greece will be taken after the Troika’s report in September but rejected the possibility of a “substantial watering down” of Greece’s current bailout terms. Avramopoulos noted that his government will soon present its plans to cut budget deficits to meet the fiscal targets. Both leaders refused to comment on whether Greece could get more time to meet its reform targets. Greek Prime Minister Samaras is scheduled to meet German Chancellor Merkel on August 24, but we do not expect the outcome to be materially different given that “waiting for the Troika’s report before any decisions are taken” is the official position now. We expect EURUSD to be range bound until investors get further guidance on Greece’s bailout terms and the ECB’s bond-buying programme. The RBA minutes are due today. Given that the central bank in its August meeting noted the growth outlook to be “close to trend”, the inflation outlook “consistent with the target” and the cash rate “appropriate” at 3.5%, we expect the minutes to give little new information. We think investors would rather focus on Governor Stevens’ semi-annual testimony to the parliament on August 23 for further cues on AUD, especially in the wake of the Treasury’s comments last week highlighting the strength of the currency and possible further rate cuts by the RBA.
Click here to read the full report: UBS Morning Adviser Asia
UBS Investment Bank