Month End
Price action in the FX markets was dominated by month and quarter-end rebalancing flow and, in Japan’s case, flows associated with the end of the fiscal half-year. Chinese domestic media reports stated that the China Communist Party would hold its 18th Party Congress on November 8, somewhat later than market expectations but will now allow investors to better-time potential policy responses from China. Spain remains the centre of attention with bank stress test results due to be published today at 1800 local (1600 GMT). We note however that the euro is not likely to be hugely affected given that the EFSF has already agreed to provide “up to” EUR 100bn in funds specifically to fund the recapitalization effort. The capital shortfall unveiled today is expected to be in the region of EUR 60 bn – comfortably within EFSF tolerance and therefore Spain’s primary market issuance plans going forward should not be affected. Additionally, Moody’s is conducting a review of Spain’s sovereign rating and has promised a verdict by the end of September. Today being the last working day of the month, we are braced for a possible announcement just before the US close this evening. Even a single-notch downgrade would be enough to push Spain’s rating into junk territory. The euro’s reaction is again likely to be muted however – as any resulting forced selling from bondholders on Monday would likely be seen as bringing forward a full-blown Spanish aid request and a further move higher in Spanish 10y yields on Friday did little damage to the euro. Norges Bank announced it would sell NOK500 mn a day in October to buy FX as an agent for the oil fund, unchanged from September’s rate. Purchases have tended to be back-loaded in recent years so there was some speculation that a higher number may have been presented. Domestic retail sales data was below consensus, but NOK remains in demand.
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UBS Investment Bank