Reserve Composition Mostly Unchanged
EURUSD fell back to a two-and-a-half week low overnight after Slovak Prime Minister Fico said that if Greece does not meet its commitments, then a coordinated exit from the Eurozone should happen. China’s official manufacturing PMI was marginally stronger than expected, but with both Australia and China on holiday the market reaction was muted. Japan’s quarterly Tankan showed a marked deterioration over the Q2 report, but it still managed to beat depressed expectations. Even that was not enough to move USDJPY though. Late on Friday night, Spain’s bank stress tests results showed a capital shortfall at close to EUR60 bn. Details showed that 7 of the 14 banks tested do not have additional capital needs even under a “highly unfavorable macroeconomic scenario”. Under the baseline scenario, the aggregate capital needs were estimated to be about EUR25 bn. The results were largely in line with expectations and the impact on euro was fairly muted. Moody’s decision on Spain’s sovereign rating is still due and we expect a verdict quite imminently given previous guidance which suggested the outcome of the rating review would likely be released in September. We note that a possible downgrade, even by a single-notch, would push Spain’s rating into junk territory. On Friday night, the IMF released the results of its quarterly survey on the composition of global FX reserves. The snapshot was taken on June 30 and it showed very little adjustment over the quarter: the share of reserves denominated in USD fell slightly to 61.9% (prev. 62.1%); the euro’s share rose to 25.1% (prev. 24.9%); and ‘other’ currencies (outside the traditional G5 reserve currencies) still account for 5.3% of reserves. European PMIs will dominate today’s calendar. We will also be watching the UK’s lending statistics to see if the Bank of England’s new “Funding for Lending Scheme” has started to make its presence felt via a positive impact on credit growth. In the US, the manufacturing ISM report will be key and Fed Chair Bernanke’s speech on monetary policy will be a clear focus shortly afterwards. This week four central banks are due to hold policy meetings – we expect the RBA to cut rates by 25bp on Tuesday, while the ECB, the BoJ, and the BoE are expected to keep settings unchanged.
Click here to read the full report: UBS Morning Adviser Europe
UBS Investment Bank