Promises, promises

3

It seems that the eurozone is not short of pledges “to do everything” these days.  After the comments from the ECB President on Thursday, there was a joint statement from Germany and France on Friday, followed by a similar one from Germany and Italy over the weekend.

Once again, both leaders pledged that they “will do everything to protect the eurozone”. There were also similar comments from the Luxembourg prime minister (who also heads the group of eurozone finance ministers), who said: “I don’t want to fuel expectations, but… we have reached a decisive point”.

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The ECB President himself also appears to be working towards building a consensus on reducing borrowing costs for Italy and Spain. They ECB will meet Thursday of this week.  After the rally of last Thursday, the euro stands weaker vs. Friday’s European close, with action needed now to offer more solid support for the single currency.

Commentary

Winning over Germany. Ahead of Thursday’s crucial ECB meeting, winning over the German central bank will be one of the ECB President’s tougher battles. In remarks last week, it was sticking to its previous line, stating that its stance on bond-buying (overall it has been opposed) and giving the ESM a banking license (also opposed) was unchanged. The Bundesbank is right to question the efficacy of bond purchases, not least because the issue of seniority has not really been resolved. In other words, and as was the case in Greece, should the ECB’s bond-holdings (in Spain and Italy) not be included in any subsequent restructuring of debt, then large-scale ECB bond-buying will merely increase the fear that the remaining private sector debt-holders will shoulder the burden of any future debt-restructuring. If the better sentiment towards the single currency is going to have any chance of being maintained then two things need to happen. First, Draghi is going to have to follow through on his words of last week. Secondly, the ECB is going to have to do so in a way that offers reassurance to the private sector that debt-holders will not be the ones shouldering the burden. The market is looking for signs that the words are going to be backed up with credible action.

Aussie pulls back from 4mth high. The ever-resilient Aussie dollar made a new 4mth of just below the 1.05 level high in overnight trading, but has since pulled back a touch as the European session gets underway.  We’ve remarked before how the Aussie is showing a strong degree of resilience to developments elsewhere, and being less tied to other risk-on/risk-off factors such as stocks and commodities. But after three strong sessions last week, it’s perhaps not surprising to see some consolidation emerging.  The latest data on home sales, released overnight, suggests a fairly bullish picture, with sales rising 2.8% in June. The data are fairly volatile month to month, but there has been some improvement of the underlying trend of late.  Overall, the Aussie economy still compares well to many of its international counterparts.

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