Euro Steady After ECB Rumor, Focus Turning To Greece

As the rumor of ECB's plan to cap yields faded, the common currency remains bounded in range against other major currencies. Focus will shift to Greece first as prime minister Samaras will meet with Luxembourg Juncker tomorrow and then German Merkel and French Hollande later in the week. It's reported that Greece is detailing a EUR 11.5b austerity plan in 2013/14 before meeting with the European leaders and targets to get troika approval by mid-September.

The outlook will be first be presented to Juncker and is believed to include broad cut in pension benefits as well as wage reductions and layoffs in the public sector. In addition, Samaras is expected to lobby the leaders in support Greece's proposal of extending the fiscal adjustment program for two years as the country is facing deepened recession.

Talking about fiscal adjustments in the eurozone, Moody's said in a report that the work is "is at best only half complete." It compared the imbalances faced by some weaker eurozone states to a "similar crisis and adjustment period" in Sweden and Finland in the early 90s. Moody's noted that "in comparative terms, the contractions of the two Iberian countries and of Italy are relatively shallow (at least so far), approaching that of Sweden, while those of Ireland and Greece (one must note that the latter does not seem to have bottomed out yet) are more similar to the deeper and longer Finnish contraction."

It warned that "there is a considerable degree of implementation risks associated with those (reform) programs, which can only be mitigated by significant domestic commitment and ownership of the reform process, eventually shored up by continued external reform anchors and possibly support." But it also emphasized that history in Sweden and Finland showed that "success, with policy commitment and effective implementation, while difficult, is indeed possible."

Aussie is mildly firmer today following the RBA minutes. The minutes for the August meeting contained few surprises, as most of the issues were covered in the RBA quarterly Statement on Policy which was released several days after the August meeting. The minutes confirmed that the RBA acknowledged the peak in mining capex and the improvement in the outlook for housing construction from 2H2012. While keeping the cash rate unchanged at 3.5%, policymakers delivered no hints on the next move. Yet, we believe another rate cut would be announced in the fourth quarter as unemployment will probably increase due to tight financial conditions and fiscal consolidation.

On the data front, Japan all industry index rose 0.2% mom in June, inline with expectation. UK public sector net borrowing is expected to drop GBP -4b in July. CBI trends total orders are expected to drop to -9 in August. Canadian wholesale sales are expected to rise 0.3% mom in June.