Optimism Builds
The recent optimism in financial markets continued on Tuesday, with the dollar selling off versus most risk currencies and the euro. CDU budget lawmaker Barthle, in an interview with Bloomberg, said “small concessions” are possible for Greece, suggesting that the loan interest and maturity could be adjusted, which would likely pass in the Bundestag. There are mounting indications that Germany may once again give in and offer some form of concessions to allow the Greek programme to continue running, though we caution that these concessions will certainly have their limits. This positive backdrop for the euro should continue throughout the week, however, as the Samaras meetings tomorrow with Juncker and then with Merkel and Hollande will likely reinforce the message that Greece will be allowed back on track. The RBA minutes from the August policy meeting were the highlight of the overnight session in Asia. The RBA again referred to the unusual strength of the Australian dollar, which persists despite the weakening global outlook and the falloff in commodity prices. Again, the currency’s strength was attributed to foreign buying of Australian bonds, but this time the RBA made specific mention of purchases of a “modest amount” of AUD by the Swiss National Bank. The minutes implied these purchases were a consequence of diversification activity related to the SNB’s efforts to maintain the floor in EURCHF at 1.20. AUDUSD advanced modestly on the headlines but failed to break above 1.05 until the dollar selloff swept risk assets higher in Europe. Meanwhile, the RBA remains in wait-and-see mode as the effects of previous rate cuts continue to percolate through the economy. Attention now shifts to Governor Stevens’ semi-annual parliamentary testimony on August 24, especially in the wake of the Treasury’s comments last week highlighting the strength of the currency. We very much doubt the RBA is poised to intervene in the currency markets, and if the tightening impact of a strong currency eventually becomes too severe, the bank is far more likely to respond with rate cuts rather than a round of FX intervention. Elsewhere, market pressure on sovereign debt markets in Europe’s periphery continues to ease. Spanish 10y yields fell back to a 7-week low yesterday. The ECB’s next policy decision on Sept. 6 is still a long way off, but ECB President Draghi is due to address the Jackson Hole conference on Sept 1, and this could be an opportunity to update the market on his plans for the ECB’s new breed of open market operations which he first outlined almost three weeks ago.
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UBS Investment Bank