Deal still very possible for Greece
The euro bounced back healthily yesterday as once again, hoping beyond hope, traders bet that a deal would be done between Greece and its creditors at this weekend’s Eurogroup meeting. The Greek government submitted its latest proposal to the European Stability Mechanism yesterday, asking for a three year loan to “meet Greece’s debt obligations and to ensure the stability of the financial system.”
The letter also toned down the rhetoric around debt forgiveness and haircuts moving forward, and puts the ball firmly back in the creditors’ court. It stated that Greece is “committed to honour its financial obligations to all of its creditors in a full and timely manner.” I still think that a deal will be done, possibly as soon as this weekend, but a restructuring of the EUR3.5bn that is owed to the European Central Bank in 11 days’ time could ease some pressure. Obviously, bank funding issues will remain, and yesterday, it was confirmed that Greece would keep its banks closed until Monday at the earliest.
Markets happy enough with a higher euro
Contagion from Greece remains light. This could be for any number of reasons – belief and credibility that the firewall’s put in place by the European Central Bank will hold, the likelihood of a deal, the likelihood of a massive policy response if a deal is not done.
Euro was helped higher by weakness elsewhere, with Swiss National Bank Traders buying the currency in order to lower the Swiss franc, while sterling continued to feel the effect of Tuesday’s poor industrial production report.
GBP a sideline victim
The budget was not a particularly interesting one for currency markets. The main focus within it was the rate of deficit reduction, which has slowed since pre-election, as has the rate of public sector cuts. The maintenance, but no increase, in the fiscal retrenchment is seen to not be as aggressive, and therefore, can be spun as less growth negative than initially believed. The falls in GBP/EUR that we saw yesterday are more likely to be a result of traders who have sold the euro losing conviction in these trades and selling out, weakening the pound as a result.
With everything that has taken place in the past four days, it would be easy to let today’s Bank of England meeting be ignored. True, there is more chance of Boris Johnson becoming the leader of the RMT union than a rate hike today, but looking at the wider market picture, we can easily foresee what the minutes are likely to look like in a fortnight. International concerns – China and Greece – will be the focus, and the headwinds from these crises will allow the doves on the Committee to turn up the volume.
The argument will once again be a case of what is happening here versus what is happening elsewhere and likely to influence us. On that basis, there can be no rate hike, especially with inflation still well below target. I am half wondering what the language within the minutes will sound like; more QE to protect the UK in the face of a Grexit? We’ll see in two weeks.
Fed minutes add little
Overnight, the Federal Reserve minutes were anodyne, to say the least. “Most participants judged that the conditions for policy firming had not yet been achieved; a number of them cautioned against a premature decision,” the minutes said.
