Euro Summit Reaches Agreement

Daily Analysis - 13/07/2015

Greeks Able to Secure Third Bailout Deal After Marathon Talks


A deal between Greece and creditors has been reached to continue support for Greece through the ESM program pending approval from partner legislatures and Greek parliament. This is the next hurdle for policymakers as they seek to move past the crisis and restore growth in the Euro Area.

Common Ground Found

After months of wrangling, Greece has managed to secure a new bailout package for a three year time horizon worth between EUR 82-86 billion in order to fix lingering issues and recapitalize banks. Creditors, after dismissing last week’s proposals as insubstantial, agreed in principle to Greece pledging assets to an independent fund to be used as collateral against the bailout. While this may avert a crisis Greece having to exit the Euro Area, it means further austerity measures in tow for the nation. This is a dangerous political gambit as Tsipras still needs approval from the Greek Parliament to move forward with the deal which will likely prove very unpopular in his own party after embracing austerity following months lambasting the concept. Overnight losses in the Euro quickly reversed as renewed optimism that the distance between negotiating parties narrowed was viewed positively by market participants before renewed downside hit the common currency.


Industrial Production Contracts

Data released overnight from Japan prominently displayed the shortcomings of “Abenomics” after the nation recorded a -2.10% contraction in industrial production on a monthly basis. Although unemployment remains steady at 18-year lows, with inflation printing at the lowest level since the introduction of more extreme monetary policy measures, the Bank of Japan faces an increasingly complicated outlook as liquidity dries up. Although the temporary unwind in the Yen carry-trade has been able to benefit importers as the Yen appreciates in value, the USDJPY currency pair still remains slightly elevated relative to the ideal 115-120 level sought by exports to remain competitive. Across the sea in China, the trade balance released overnight slumped by 25% to CNY 46.54 billion from CNY 59.49 billion prior as imports continued to trend in negative territory and export expansion was positive but nevertheless restrained.


Crude Re-Plunges

The countdown to the announcement of an Iranian nuclear deal has begun after sides showed cautious optimism towards the recent negotiations after missing several successive deadlines. Although a few matters have yet to be closed and agreed upon, both sides are increasing the rhetoric as Iran seeks an immediate lifting of sanctions related to the economy and military development while promising to bar foreign inspectors from military sites. The US Congress is also likely to be opposed to any such framework that lifts sanctions as quickly as demanded by the Iranians. While details are not yet fully known, many of the earlier conditions for Iran to proceed with nuclear development have been toned down in an effort to get a deal done. Crude oil reopened to losses with WTI trading down over $1 point as deal optimism raised the specter of increased Iranian oil production and exports adding to already oversupplied energy markets.


USDCNH Descending Triangle Technical Pattern

Investors reversed course and moved back towards risk-assets amid the latest efforts to restore order in financial markets. The current resolution of the Greek bailout measures coupled with China’s renewed efforts to stem the volatility in equity markets has translated to reduced demand for safety assets such as the US dollar. Even though data released overnight from China showed that imports continued to fall while export growth was weak, the Chinese offshore Yuan continues to appreciate, hurting trade further as exports become more expensive. The descending triangle technical pattern forming in the USDCNH pair exhibits a bearish bias with any break of support at 6.2127 paving the way for a triangle-based breakout in the pair. A move above the near-term downtrend line could mean a potential reversal higher in the USDCNH pair.


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