German IFOs Due
FX markets mostly consolidated overnight given the general lack of news flow and economic data releases. The Australian dollar was the exception however, dropping over 40 pips at one point (on low volumes) amid continuing market concern over whether mining investment plans might be scaled back in response to weaker commodity prices. Over the weekend, Der Spiegel reported that Germany’s Chancellor Merkel wants to draw up a new EU Treaty, and hopes – by December – to have agreed on a date for setting up an EU convention to examine the issue. If confirmed, we believe investors would likely see this as a long term euro-positive, given it would credibly demonstrate Germany’s willingness to do whatever it takes to keep the euro project intact. Meanwhile the euro has failed to recover the ground it lost on Friday after newswire sources from inside the ECB revealed that the central bank will await the German constitutional court ruling on the ESM (due on Sept. 12) before finalising its proposed new bond-buying programme. The prospect of another ECB press conference lacking in specifics could prevent the euro staging a decent recovery over the next 2 weeks, although events on the other side of the Atlantic will also exert an influence. On Friday, the Fed released a letter from Chairman Bernanke to a Republican congressman, defending the central bank’s policy actions and noting that there is “scope for further action” should the Fed deem it necessary “after weighing the cost and benefits”. Though this stance is nothing new, it probably raised market expectations of further Fed stimulus in September – especially against the backdrop of the latest FOMC minutes. Bernanke’s annual speech at Jackson Hole on Friday Aug. 31 is expected to offer some clues as to his own policy intentions, but as noted in our latest FX Comment (“Trading Jackson Hole”), FX investors should not expect complete clarity. We do, however, see value in owning short-dated vol (1w or 2w) in USDJPY over this period. With the UK on holiday today, Germany’s IFO survey is likely to be the main focus of market attention.
Click here to read the full report: UBS Morning Adviser Europe
UBS Investment Bank