EU leaders fail to agree on Greek bailout

The weekend meeting for EU finance ministers failed to see an agreement forming over Greek bailout and did not release loan payment to Greece to avoid default, adding pressure on Greek Prime Minister Papandreou to first deliver budget cuts despite domestic opposition. EU ministers have been forcing Greece to cut deficit and sell state assets before they can release the 12 Billion Euro July payment as a part of the 110-Billion Euro package. Prospects for a second aid package to avoid the EU’s first default had been enhanced by last week’s decision by German Chancellor Angela Merkel to drop calls for a mandatory bond exchange that might lead credit rating companies to declare Greece unable to pay its debts. Moody’s said it may cut its Aa2 rating on Italy, whose 2010 debt amounted to 119% of GDP, second highest after Greece.

The EURUSD fell for the first time in three days to lows of 1.4192 after no agreement was reached among EU leaders, EURJPY declined for a fourth day to lows of 113.59, its longest losing streak in six weeks, before the Greek parliament resumes debating a motion of confidence in Prime Minister Papandreou’s government. The Dollar strengthened against most currencies as investors bought safer assets. USDJPY strengthened to 80.24 after Japanese exports fell 10.3%, more than forecast, AUDUSD dropped to 1.0506 and NZDUSD slumped to 0.8054 as commodity prices dropped and Asian shares reversed gains.

The dollar strengthened on speculation the Fed won’t signal another round of QE in a meeting on June 22, the FOMC has kept its benchmark rate unchanged between 0% - 0.25% since December 2008 and will conclude its $600 billion dollar bond- buying program, by the end of this month. The FOMC is expected to make the formal decision to conclude QE2 at the end of June, Fed Chairman Bernanke will likely reiterate that the balance of risk doesn’t favor further asset purchases, and these comments are expected to be dollar positive.

With the economic calendar remaining light for the day, we are expecting the EU ministers meet today to be the market moving data whereby any further developments towards Greek bailout could provide light on the market movements with the Euro remaining weak, and Dollar strong across the board. EU ministers formally meet on June 23-24 to give further details on the bailout package although any deal is expected to arrive in July.