[B]Financial News August 18, 2015
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[B]No price pressure in UK[/B]
Recent, more dovish statements by the Bank of England have dampened rate-hike expectations in the UK. Sterling suffered, of course. Today, the ONS will release several inflation series for July. None of them is likely to signal that rate hikes are necessary.
Year-on-year producer price inflation looks set to be clearly negative.
According to Commerzbank, “Consumer prices are likely to have risen a bit more strongly, but not much. Headline inflation looks set to have remained at 0.0%. Only the core rate might provide a ray of hope; it might climb to 0.9% and thus be not too far away from the BoE’s target of 2%. The BoE has recently focused on wage inflation, which should lead to price pressure if the economy is doing well.”
[B]IMF participation in Greek aid package more than a political question[/B]
The negotiations about the bailout package for Greece have reached their final stage - at least that is what the German government suggests. The FX markets are certain that the Bundestag will not withhold its agreement tomorrow.
While EUR-USD has depreciated slightly again over the last few days and is trading around 1.1060 this morning, the euro is not experiencing a significant bout of weakness, says Commerzbank.
Once again, the bailout package is throwing key structural concepts overboard which were originally introduced to protect the euro. The Bundesbank recently emphasized again that a haircut would definitely violate the EU Treaties. However, Greece benefited from a debt haircut some time ago.
Still, this “debt haircut light” has a small flaw, which might have significant consequences for EMU as a whole. This time, the IMF is at the centre of the problem. The fund says it will not participate in a bailout package which does not include a palpable debt haircut. That creates a problem for all those who claim that the support loans will be paid back eventually. Why is the IMF insisting on a debt haircut? Because, according to its analysis (which nobody contradicts), Greece´s debt level is unsustainable. Under its statutes, the IMF may not extend loans to countries if it is obvious that the debt service is not bearable in the long run (i.e. if the country has taken on too much debt). It seems quite impossible to find a compromise with the IMF on this issue.
If the IMF does not provide financial assistance, it will no longer be able to exercise pressure during the regular monitoring of the programme. And who, apart from the IMF, is really capable of monitoring whether Greece implements the agreed-upon reforms as planned? Neither the EU Commission nor the ECB have the necessary staff or expertise. Nor does the ESM, which was created only in 2013 and has only 140 employees. The IMF is the only organization which has decades of experience with helping flailing countries. And it can only use this expertise if it has the opportunity to exercise pressure. The real problem about a “debt haircut light” is that the IMF’s know-how will not be available any longer. The Greek bailout has not been a success story so far, and it is unlikely to become one if the IMF is no longer one of the creditors.
The key question for the FX markets is now: How long will it take until the Greek issue pops up once more and negotiations for a fourth bailout package become necessary? The an-swer may surprise some: Without the IMF, it might take longer until it becomes obvious that the recently agreed measures are not implemented or insufficient. One reason is that the remaining supervisors are less experienced, another that all parties are under more political pressure. However, the longer the calm continues, the bigger the damage in the end, adds Commerzbank.
[B]Market Review August 18, 2015
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In minutes of its monetary policy meeting, the Reserve Bank of Australia (RBA) said that weakening currency is assisting a transition away from mining investment, while adding that accommodative policy remains appropriate to support growth. Furthermore, the minutes for August meeting noted that “an accommodative monetary policy setting remained appropriate given the forecasts, while observing that the Australian dollar had been adjusting to the shift in activity in the resources sector from the investment production phase." The central bank reiterated that “further depreciation of the Australian dollar was expected to impart stimulus to the economy through stronger net exports.”
The central bank kept its cash rate steady at 2.0 percent and noted that “New information about economic and financial conditions would continue to inform the Board’s assessment of the outlook and determine whether the current stance of the policy remained appropriate to foster sustainable growth and inflation consistent with the target.”
RBA also commented on the expected rate hike by Fed this year and said that “it was likely that financial market volatility would increase and the U.S. dollar could appreciate further, including against the Australian dollar.” AUD/USD remained within the previous days range and currently is trading near the 0.7345 area.
The early European session is quite empty with the focus turned on the UK inflation data that will be released later during the day.
Additional economic releases will be the United States Building Permits , Housing Starts and New Zealand’s GDT Price Index.
[B]Data releases to monitor:[/B]
GBP: CPI, PPI Input, RPI, Core CPI, HPI, PPI Output.
USD: Housing Starts, Building Permits.
NZD: GDT Price Index.
[B]Trade Idea of the Day
EUR/USD[/B]
Currently the pair is trading at 1.1067. Traders must monitor the 1.1213 resistance level and the support level of 1.0925 for possible breakouts. A possible scenario would be a movement towards the 1.1035 support level where a break may lead to the 1.0990 area. An alternative scenario could be a movement towards the 1.1103 resistance level where a break could lead to the 1.1155 area.