Greece’s lenders finally clinch a deal

Late last Monday, eurozone finance ministers finally struck a deal to cut Greece’s interest rates and redesigned their aid plan. After 12 hours of talks in the fourth Greek crisis meeting in two weeks, ministers convinced the International Monetary Fund, which was until yesterday rather sceptical, that they have the formula which would bring the country responsible for putting Europe in its current crisis back out of it.

The British economy grew at its fastest pace since 2007 in Q3, lifted by higher consumer spending and better exports- Emman Xuereb

The deal, which was announced by Eurogroup chairman Jean-Claude Juncker and IMF chief Christine Lagarde, included a reduction on interest charged on bilateral loans by 100 basis points, a deferral of interest payments due on EFSF loans by 10 years, and an extension of the maturity of the loans to 30 years from 15. Haircuts on existing loans were not part of Monday’s deal, but will likely be discussed eventually. German Finance Minister Wolfgang Schaeuble said they “didn’t discuss a debt cut” but said further measures to reduce Greece’s debt burden will be considered once Greece reaches a primary surplus and fulfils all its commitments.

Greece’s lenders agreed measures to cut its debt to 124 per cent of gross domestic product by 2020, and promised further steps to lower it below 110 per cent in 2022. Lastly, the agreement cleared Athens to receive the next tranche of crucial emergency aid. Greece will now receive a payment of €43.7 billion, instead of €31.5 billion as was previously envisaged.

The euro spiked to a one-month high initially after the announcement of the agreement, but pared its gains versus the US dollar during the European session on Tuesday as the initial euphoria faded.

EUR/USD hit a one-month peak by 1.3009 late on Monday, but retreated to a session low of 1.2929 as analysts depicted this news only as a temporary relief, and suggested that the worsening economic outlook for the euro area given unrelenting austerity will only keep the single currency under pressure. The pair was also weighed by comments from Federal Reserve Bank of Dallas president Richard Fisher, who expressed concerns over the Fed’s quantitative easing programme.

On a technical level, the EUR/USD pair failed to break decisively above a key resistance level around the 1.3000 level, which is represented by a falling major bearish trend from the May 2011 high. Near-term support is seen by its 50-day moving average around 1.2950, and a break of this level could give scope for further declines towards 1.2800. On the other hand, a break above 1.3000 could give scope for further gains towards 1.3200.

The USD/JPY retreated slightly on Tuesday, after rallying sharply over the last two weeks. The dollar hit a seven-and-a-half month peak at 82.84 on Thursday last week, its highest since April of this year, on mounting speculation that a new government after the December 16 election would compel the Bank of Japan into bolder monetary policy easing. The pair fell to 81.86 in European trade on Tuesday, but the yen is likely to come under renewed pressure as Shinzo Abe, Japan’s Opposition Leader and favorite to be the country’s next Prime Minister reiterated his call for more aggressive monetary and fiscal stimulus to give new life to an ailing economy. EUR/JPY also retreated from close to a seven-month high at the start of this week, down to 106.09 from its peak by 107.14.

The Office for National Statistics in London said that the British economy grew at its fastest pace since 2007 in the third quarter, lifted by higher consumer spending and better exports. The Olympics and a post-Jubilee rebound boosted household expenditure to its highest in over two years.

Data published on Tuesday showed GDP in the UK rose one per cent in the third quarter, in line with market consensus. GBP/USD rose to a one-month high to 1.6056 extending its gains after hitting more than a two-month trough by 1.5828 on November 15. EUR/GBP backed off a one-month high of 0.8114, and fell to 0.8062 following the economic growth data from the UK.

Upcoming FX key events:
Today: German unemployment change, EZ business climate index and US GDP Preliminary.
Tomorrow: EZ unemployment rate, EZ flash inflation, Canadian GDP & US PCE.

Technical Key points:
EUR/USD is neutral.
EUR/GBP is bullish target 0.8220, key reversal point 0.7950.
USD/JPY is bullish, target 0.83, key reversal point 79.25.
GBP/USD is neutral.
USD/CHF is neutral.
AUD/USD is neutral.
NZD/USD is neutral.

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Emman Xuereb is a trader at RTFX Ltd.