FUNDAMENTAL OUTLOOK at 0800 GMT (EDT +0400)
EURUSD staged a fierce three big-figure rally heading into the North America close as the details of the Eurozone Summit agreement were first leaked and then announced. Apart from an increase in EFSF flexibility, more measures such as a “Marshall Plan” for Greece and other countries and credit enhancement for collateral to guarantee continued financing for Greek banks from the ECB were agreed upon. Overall, Greece hoped to achieve a 20% reduction in the net present value of its debt burden using maturity extensions, interest rate reductions and also private sector participation, in a comprehensive package worth EUR160 bn. There are many areas where more details are needed, such as private sector participation and how it would be viewed by the ratings agencies, but the general verdict is that as much as could have been achieved has been achieved, and the risk of contagion has been reduced as the EFSF has been given maximum flexibility. EURUSD rallied from a low of 1.4139 at the New York Open to a high of 1.4437 by the close, while Eurozone stocks were also solid, with Milan ending the day 3.75% higher. There were no fresh developments from the US debt-ceiling debate but markets largely felt that all parties continue to head in the right direction. USDJPY however did not find many takers and traded lower throughout the day in a range of 78.22-79.03. Jobless claims figures were slightly softer.
EUR
The Eurozone Summit ended with an agreement which was welcomed by markets, judging by price action. It contained the following decisions:.
A new program for Greece valued at close to EUR160bln, with EUR109bn provided by official sources and the rest from the private sector.
Private sector participants are expected to participate in bond buybacks and rollovers which involve exchange current securities for longer-dated securities. They will be given four options, as designed by the IIF.
Greece, Ireland and Portugal will all realise interest rate reductions and maturity extensions on their current programmes, however private sector participation will be for Greece alone.
A “Marshall Plan” will be created for Greece to strengthen the economy, this was not expected by markets initially and may have boosted confidence. Institutions such as the European Investment Bank would be called upon to supply Financing.
The EFSF and ESM will be given greater flexibility. They will be allowed to recapitalise financial institutions, provide precautionary credit lines and intervene in secondary markets given ECB acquiescence.
The ECB will receive ‘guarantees’ on collateral quality in their repo operations through a credit enhancement programme. According to ECB President Trichet, there will be no pre-judgement on the quality of Greek collateral and so far their base assumption is that this will not be a credit event.
Ratings agencies are yet to have their say on the overall agreement and the statement itself contained a clause which has questioned their role. Sarkozy noted in his post-summit comments that a European Ratings Agency will be in the pipeline.
Sarkozy noted that the Euro is an ‘irreplaceable’ achievement of European integration and judging by rhetoric from the Eurozone leaders, the current program has pushed their tolerance levels to the limits and the bottom line remains that Greece is to be prevented from default or Eurozone exit at all costs.
CHF
EURCHF rallied to 1.18 on the back of the Eurozone summit results though there may be some profit taking on Friday as markets wait for verdicts from ratings agencies and other parities.
In figures released Thursday, the Trade balance fell to CHF1.74bln but exports continued to defy expectations, rising by 5.2% on the month. Imports also jumped by 2.5% after an 8.4% decline last month (due to extraordinary factors). Overall the Swiss economy continues to display surprising resilience.
CAD
Inflation figures are due out of Canada on Friday, the market is looking for headline inflation to dip slightly to 3.6%, but still well above target, while core CPI may edge higher to 1.9%, close to the operational guidance. Although the BoC wishes to normalise cautiously, a higher than expected core print may force their hand.
GBP
UK June PSNCR was GBP20.969 bn against forecasts for GBP17.0 bn. May’s requirement was revised to GBP11.34 bn from a preliminary GBP11.1 bn. Last June, the PSNCR had been GBP8.955 bn. For the fiscal year to date, the PSNCR was running at GBP35.6 bn against GBP5.3 bn for the same period a year ago.
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