The euro has rallied overnight against all the other major currencies as investors cheered news that European leaders had agreed on a strategy to contain Greece’s debt crisis. At their summit, Europe’s leaders agreed on an overhaul of the euro zone sovereign rescue fund, a move that encouraged risk appetite.
The deal agreed by European leaders in Brussels will see Greece swap its current debts for ones which will be much easier to pay. There are various new terms on offer to the lenders but the essential point is that Greece will get up to 30 years to repay its debts. The deal also require lenders to reduce the interest rates they charge Greece for its loans and take ‘haircuts’ (or losses) on their loans up to a total of around 21% according to the Institute of International Finance.
With the objective of saving the euro, the European bailout fund known as the EFSF was given new powers to act in the bond market on behalf of Greece to make sure this “cure-all” actually works. In addition, it can also begin to raise money for other troubled nations like Spain and Italy; it will do so because it will have the financial fire power of the whole euro area, including France and Germany behind it.
There are still question marks over whether the new beefed up EFSF will be able to cope if a major euro zone economy, like Spain or Italy really begins to hit the buffers. For the time being, however, investors appear to be happy just knowing there is a plan.
Yesterday’s UK data again disappointed. Public sector net borrowing rose to £13.98 billion in June according to data from the Office of National Statistics. UK retail sales were also up a modest 0.7% after the heavy fall registered in May. Analysts suggested that the Chancellor now has a serious fight on his hands to ensure that the UK borrowing ceiling of £122 billion for the current financial year is not exceeded.
Meanwhile hopes that Washington is moving closer to agreeing on its debt ceiling boosted market sentiment and eroded appetite for safe haven currencies.
As a result, the DOW Jones had its second best day of 2011 so far and the Far East markets also rallied. The dollar is sharply down as a result as demand diminishes for its safe haven status.
The high yielding risk currencies like the Australian and New Zealand dollars and South African Rand are also up on the positive overnight news.
Commentary by Tony Redondo
“Any opinions expressed in this document are those of TorFX analysts. Any analysis and/or forecasts provided are aimed at helping clients understand market conditions and developing trends. Clients are wholly responsible for their own trading decisions.”
