Focus On JPY
EURUSD reached the highs of 1.317 on Friday during the New York hours as risk appetite remained robust and USD weakness continued for the second consecutive day following the Fed’s QE3 announcement. Spanish bonds, however, sold off and 2y yields were up by 20bp as Spanish Economy Minister de Guindos noted that the government will put forward a “new set of reforms to boost growth” – indicating that Spain wants to convince the EU leaders that it does not need a fully-fledged bailout program. The Eurogroup meeting on Friday was largely uneventful. IMF Director Lagarde and Dutch Finance Minister Jager both indicated that Greece can be given more time to meet its budget targets. Eurogroup chief Juncker remarked that it will not be possible to take a decision on Greece until the first half of October. The ECOFIN meeting on Saturday focused on the implementation of the single bank supervision mechanism but negotiations hit a deadlock, with member states unable to agree on the details and the timelines. While EU Financial Services Commissioner Barnier set an “ambitious objective” of having the bank supervisor ready by the year-end, Germany, Sweden and the Netherlands noted that it is an “impossible” and “unrealistic” goal. German Finance Minister Schaeuble said he wants “stress tests” on banks before the transfer of oversight. His Swedish counterpart noted that nations are “far away from reaching a compromise” and the coming months will see “a lot of tough negotiations”. Considering that a single supervisor is a necessary condition before the ESM could start recapitalizing Eurozone banks, a continued deadlock could weigh on the recent EUR rally. In the US, August Retail sales grew by 0.9% m/m but the details were weak with sales ex autos and gas up by only 0.1% m/m against the 0.4% consensus. Overall CPI increased in line with expectations at 0.6% in August after being flat in July and industrial production in August was down by 1.2% m/m. Notwithstanding the soft data, USDJPY rallied 80 pips on Friday as US Treasury yields inched higher and as intervention risks from the MoF persisted following the Cabinet Office’s downgrade of economic assessment. The BoJ will start its two-day policy meeting tomorrow. Our economists expect the central bank to stand pat this week and see next month, when the BoJ releases its inflation projections, as a better time to provide further stimulus. We expect USDJPY to be a range trade for now and stick to our 1m forecast of 78.
Click here to read the full report: UBS Morning Adviser Asia
UBS Investment Bank