Bundesbank Holds Firm
The euro reversed its early gains in the European session as the optimism surrounding an article in German paper Der Speigel about ECB bond-buying quickly faded The article itself reported that the ECB is considering setting a cap on Eurozone sovereign yields (defined as a maximum acceptable spread over German paper). However, German Finance Ministry Spokesperson Seibert said they were not aware of any such plan. The Bundesbank’s August economic report then made it very clear that the bank remains opposed to any significant increases to risk-taking inside the ECB (with regards to bond buying). Our fixed income strategists think it is very unlikely that explicit yield targets will be announced at the September meeting. These comments were not directly related to the Speigel article, but served to send the euro 30 pips lower nonetheless.. USDJPY held onto last week’s gains, despite Japan’s return from a week-long holiday. The pair even set a new 5-week high of 79.66 before settling back down again. Flow was light however with most of South East Asia and the Middle East on holiday. Fed Chair Bernanke’s Jackson Hole speech is still over ten days away and, as such, the August FOMC minutes due on Wednesday are likely to be the next major directional trigger for the yen. We expect Greece to swing back onto investors’ radars this week too as Greece’s Prime Minister Samaras is due to meet Germany’s Chancellor Merkel and France’s President Hollande on Friday, where the question of granting a 2-year extension to Greece’s austerity program is bound to be discussed. Merkel and Hollande are due to meet alone the day before. We doubt however that any firm decisions will be announced until the troika has concluded its latest quarterly review in late September. Weekend press reports indicate that France wishes to show leniency to Greece as a price worth paying to hold the Eurozone together. Germany however still sounds largely uncompromising although the latest language suggests room for compromise. For example, German Foreign Minister Westerwelle said Germany would not consider easing the “substance” of the reforms already agreed. Germany’s Finance Minister Schaeuble added “it is not responsible to throw money into a bottomless pit…we cannot create yet another new program”. Data flow in the US remained moderately upbeat on Friday with the University of Michigan consumer sentiment index rising above consensus to 73.6 in early August, and the index of leading economic indicators rising by 0.4% (cons. 0.2%). Data releases are limited today –
although a EUR 3.2 bn Greek sovereign bond is due to mature. Greece raised over EUR 4 bn last week at a bumper T-bill auction, so repaying the maturing bond today should be just a formality.
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