Greece Reaches Bailout Agreement with EU; RBA Remains Hawkish in Latest Policy Statements

By 24 Jun 2011 0 comments

The Asian session saw some declines in volatility after the wild price swings that occurred on Thursday.  Asian stock markets are in positive territory as risk aversion seems to have disappeared for the time being.

News from the Eurozone was the driving influence, as Greece and the EU made an announcement that a bailout agreement had been achieved, and austerity measures are set to begin.  This announcement sent risk assets higher, which was a reversal, given the recent Fed speeches and disappointing US macro data.

Significant risks remain for the Greek economy, and there are still events that can create uncertainty.  There will be an austerity vote next week but at this stage the markets seems to be thinking that the worst of the situation has already passed.  The current agreement will last 5 years, and assessments will be made each quarter during that time.   The EUR/USD has moved up to 1.4160-1.4280 with the USD/JPY at 80.40-80.60.

This Friday, markets will be anticipating the US first quarter GDP data (final release) along with durable goods figures and the core PCE.  In Europe, German IFO for the month of May will also garner market attention.

Another story that will come back to the forefront this summer is the US debt ceiling, which is expected to be raised some time before August.  In theory, if this does not happen, defaults could be seen.  But even if this is the case, the delays are likely to be temporary.  So, the main issue going forward will be the level of uncertainty and disruption that these delays will cause.  Total US GDP growth could be negatively affected, and the Federal Reserve could be forced to inject another round of economic stimulus in the worst case scenario.

Earlier today, the Greek PM (Papandreou) announced that an agreement was made with the EU, and specifics related mostly to budget cuts in the domestic economy.  The plan resembles the five year plan that was approved by the government in Greece and the EU released a statement confirming that the country’s financing needs in July would be met and that defaults would be avoided.

Both Greece and the EU have acknowledged that both sides will need to show flexibility in order to avoid economic disruption in the future.  One German financial advisor reported that that Greece will need 40%-50% of its debt to be forgiven, which is more than what the Eurozone is currently allowing for, so it will not be totally surprising to see some changes made to the agreement later on.  In macro data, Euro traders will be watching the German IFO data released on Friday, with markets expecting a strong reading above 113.

In other currencies, the Swiss Fran made gains across the board yesterday as markets were seeking safe assets.  Also supporting this activity was a strong trade balance release, which came in at 3.3 billion Francs for the month of May.  Contributing to the number was a large decline in imports, which was enough to balance the 1.5% drop in exports.

In Australia, the RBA released a statement suggesting interest rates will remain elevated for the foreseeable future.  The bank remains relatively hawkish but will keep a close eye on the macro data releases so that bias can be confirmed.  Second quarter CPI is likely to be the most important figure in making these determinations, and significant rises will be key for timing future rate increases.

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