Friday April 16, 2010 - 16:02:17 GMT
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FX Briefing - Euro seesaws on Greek crisis
FX Briefing 16 April 2010
ï Scepticism over possible aid for Greece persists
ï Discussions to be held on aid programme
ï Global economy continues to recover in low interest rate environment
Euro seesaws on Greek crisis
Scepticism about Greece is still persisting. Only last weekend, EU finance ministers and central bank governors had agreed on further details regarding the Greek aid package, but this week fresh doubts emerged as to whether the aid would actually be forthcoming, should it be necessary. The forex markets were correspondingly volatile. The euro erased some of the gains made at the beginning of the week: at about 1.35, EUR-USD ended the week at around the average level of the last two and a half months; during this period it was confined to a relatively narrow trading range of around 1.32 to 1.38 despite the Greek crisis. USD-JPY was similarly volatile this week. The yen closed the week at 93 â the previous weekâs level.
Last Sunday, the eurozone countries agreed on further details of the rescue plan: if necessary, Greece is to be granted loans of up to â¬45bn in the first year. The interest rate charged would be much lower than the market rate. Two thirds of this amount would be provided by eurozone member states according to their respective ECB capital key: a maximum of â¬8.4bn would come from Germany, â¬6.3bn from France, and â¬5.5bn from Italy.
Market participants do not see national parliaments readily approving such large loans. And they expect governments to face stiff political opposition. Thus after a sharp rebound at the beginning of the week, Greek bonds plummeted again: at the end of the week, yields were once again approaching the record levels seen before the agreement was reached.
This finally prompted the Greek government to request discussions with the EU Commission, the ECB and the IMF on a multi-year programme of economic policies. These talks are to be held next week. Activating the rescue package, which could involve financial support from the eurozone, is also likely to be on the agenda of the Ecofin Council meeting in Madrid, which starts today. However, it will take some time until it becomes clear how quickly the loans from the eurozone member states will materialise, if at all. In the first instance, Greece will probably receive a standby loan from the IMF.
The Greek crisis will continue to occupy the European central bank for a good while yet, thus pushing the prospect of an exit from ultra-loose monetary policy and possible interest rate hikes into the even more distant future. It is also considered fairly certain, that there will be no quick exit from the expansionary policy on the other side of the Atlantic either. Capacity utilisation is still at a very low level, and the labour market is only gradually recovering.
This was confirmed again by this weekâs US data. Capacity utilisation only increased slightly in March, and initial jobless claims rose unexpectedly. The core inflation rate fell again in March, which also fitted into the picture. There is no sign of inflation pressure anywhere. In this respect, Fed representatives had no problem this week maintaining the phrase âextended period of timeâ.
The global economy is continuing to recover in this low interest rate environment. This week, the growth figures from China and other Asian countries stood out particularly: Chinaâs economy, boosted by the economic stimulus packages, posted buoyant growth of about 12% year-onyear in the first quarter. This has fuelled fears of overheating and inflation; the inflation rate has dropped again recently, however. The Chinese government is expected to gradually adopt further measures to curb growth. One of these could be to let the yuan appreciate more rapidly.
Next weekâs economic data are likely to point upwards for the most part. We are expecting the sentiment indicators to have continued improving across the board.
Uwe Angenendt +49 69 718-3648
+49 69 718-3642
Foreign Exchange Trading
+49 69 718-2695
Matthias Grabbe / Klaus NÃ¤fken
+49 69 718-2688
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