The Greek legislature passed some key reforms as required by creditors as a pre-condition for negotiations on a new bailout. This time the laws were voted in with overwhelming majorities, even if the discussions beforehand were protracted, sometimes you need to vent especially when you already know which way the wind blows. There are no real choices here, this was likely always a formality, and rightly so as a €3.2bn repayment to the ECB comes due near the end of August – the ECB is no IMF! In other parts of Athens there must have been some good cheer as well, the banks would have felt some relief at news that the liquidity assistance facility at the ECB was increased by almost a billion.
Not exactly breaking news, but an article in the Financial Times today notes that borrowing in the Eurozone has risen to record levels. Well… duh! One would imagine that the likes of Greece are high on the list of guilty sovereigns, but they are by no means alone, and Belgium and Italy have historically had excessive levels of sovereign debt. This is not a situation that is likely to turn around soon, particularly given the anaemic growth levels in the Eurozone. Ireland is certainly the poster child for Germanic style fiscal orthodoxy. They took their pill, and look to be coming out of some tough years with impressive growth numbers, and now tax revenues are beating expectations. The Irish find themselves in the happy situation of deciding how to take advantage of this windfall. No doubt, those to the south and east can only look on with envy.
But what does this all mean for currencies? To my mind this merely illustrates the difficulties and the time it will take for Eurozone states to get on to a proper sustainable recovery path, if it is possible at all. Interest rates are likely to remain low in the Eurozone for an extremely long time, it could be considerably more than a decade. Meanwhile other parts of the developed world should achieve policy normalisation. In fact the Bank of England minutes – published yesterday – indicate that but for the Greek crisis, some members would probably have voted for an interest rate rise at the last meeting. You don’t have to be a rate strategist to figure out the less noise we hear from Greece the more likely normalisation will begin in the UK. This news will keep sterling bid, it has been one of the stronger currencies in recent weeks, and this looks set to continue. New lows in EUR/GBP (highs in GBP/EUR) look very likely indeed.
We get retail sales data in the UK later on this morning, an interest rate decision in South Africa (a hike is expected), and some consumer confidence and leading indicator data from the U.S. Marginally interesting I would say. I’m also keeping an eye on the oil price in the background. It continues to grind lower and I still think a re-test of the year’s lows is probable. This is of interest because pressure on the commodity complex is sure to impact resource rich countries and their currencies. And as you know, here at ParityFX, we’re all about the currencies! The dollar correction seems to be sustaining this morning, I could easily see EUR/USD getting into the mid 1.10s before we see a re-start of weakness. Our base case remains that the greenback will recover most of this week’s losses by the close on Friday.
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