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Euro remains subdued despite breakthrough in troika negotiations

EUR

The euro had a mixed day, which came as something of a surprise given the considerable breakthrough which happened in the ongoing Greek cash-for-reform negotiations, after the Greek government came up with new proposals which gave further concessions to creditor demands for tougher reforms.

It was reported that the new proposals put forward by the Greek government allowed for cuts to pensions, which they previously would not concede, scraping the right to take early retirement, with an overall 0.5% reduction to the pension bill. They also agreed to increase taxes on middle and high earners, and increase levies on businesses of over 500k per annum net income.

Both the head of the Euro-group Jeroen Dijesselbloem and the chief of the European Commission Jean-Claude Junckers were very positive about the new proposals, with the former saying that they formed the basis for a deal, which would probably be struck this week, and Junckers, that he was convinced an agreement could be made this week.

Out of the major creditors the only one to remain sceptical was the IMF, which still did not see the reforms as far reaching enough, however, the E.U institutions appeared to be backing the new agenda.

The euro was also supported by the news that the ECB increased liquidity provision to Greek banks by yet more on Monday, after raising the cap on both Wednesday and Friday last week. The central bank was forced to do this after it was feared Greek banks would falter after a massive exodus of capital during the period of the negotiations, as a solution drifted further out of reach.

USD

The dollar rose on Monday after it was spurred higher by data showing a rise in Existing Home Sales in May of 5.1% from -3.3% in the previous month. The rise was the fastest since November 2009. Analysts had expected a lesser 4.8% rise instead.

The data showed Existing Home Sales reached a 5-year high of 5.35m, beating expectations of 5.25m.

It confirmed the Fed’s assessment of the housing market as showing “some improvement”.

Other data was not so strong, however, after the Chicago Fed National Activity Index showed a lower-than-expected -0.17 fall when a 0.16 rise had been expected, from -0.19 previously.

Nevertheless the greenback showed broad-based gains across most pairs.

GBP

The pound weakened broadly on Monday after traders decided to book profits on the recent strong rally, and safety flows dried up following good news on the Greek cash-for-reforms negotiations.

There was no hard data but there was commentary from BOE’ s Sir Jon Cunliffe, who gave a talk on the “productivity puzzle” in which he addressed figures which showed that average worker’s productivity had fallen by 15% since before the financial crisis.

He argued that one possible reason for the drop-off in productivity might be a lack of financial reward or incentive received by workers due to subdued wage growth, and if this were the case than rising pay should begin to solve the productivity puzzle.

However, if this did not turn out to be the case then rising wages married to a persistent lack of productivity would create a output shortfall, which would lead to increased inflation, forcing the BOE to raise rates earlier than planned.

JPY

The bank of Japan maintained its massive stimulus programme and its upbeat assessment of the economy on Friday signalling its conviction that growth will strengthen enough to accelerate inflation to its 2.0% target without the need for more monetary easing.

With business sentiment improving and capital expenditure picking up, the BOJ maintained its rosy assessment that the economy continues to recover. Governor Kuroda said companies are increasingly diverting their strong profits into capital expenditure and wages, underpinning the economic recovery.

Data released today showed that the final estimate of Japan’s leading and coincident indices dropped to 106.4 and 111.0 respectively in April. Preliminary figures had indicated a rise to 107.2 and 111.1 respectively.

Early this morning Japan’s Finance Minister Taro Aso stated that he was closely monitoring the Greek situation and warned that if negotiations between Greece and its creditors collapsed again, it could have a detrimental effect on Japan as well as the global economy.

The yen was trading at 123.37 per dollar in the second half of the New York session.

EUR

The euro had a mixed day, which came as something of a surprise given the considerable breakthrough which happened in the ongoing Greek cash-for-reform negotiations, after the Greek government came up with new proposals which gave further concessions to creditor demands for tougher reforms.

It was reported that the new proposals put forward by the Greek government allowed for cuts to pensions, which they previously would not concede, scraping the right to take early retirement, with an overall 0.5% reduction to the pension bill. They also agreed to increase taxes on middle and high earners, and increase levies on businesses of over 500k per annum net income.

Both the head of the Euro-group Jeroen Dijesselbloem and the chief of the European Commission Jean-Claude Junckers were very positive about the new proposals, with the former saying that they formed the basis for a deal, which would probably be struck this week, and Junckers, that he was convinced an agreement could be made this week.

Out of the major creditors the only one to remain sceptical was the IMF, which still did not see the reforms as far reaching enough, however, the E.U institutions appeared to be backing the new agenda.

The euro was also supported by the news that the ECB increased liquidity provision to Greek banks by yet more on Monday, after raising the cap on both Wednesday and Friday last week. The central bank was forced to do this after it was feared Greek banks would falter after a massive exodus of capital during the period of the negotiations, as a solution drifted further out of reach.

USD

The dollar rose on Monday after it was spurred higher by data showing a rise in Existing Home Sales in May of 5.1% from -3.3% in the previous month. The rise was the fastest since November 2009. Analysts had expected a lesser 4.8% rise instead.

The data showed Existing Home Sales reached a 5-year high of 5.35m, beating expectations of 5.25m.

It confirmed the Fed’s assessment of the housing market as showing “some improvement”.

Other data was not so strong, however, after the Chicago Fed National Activity Index showed a lower-than-expected -0.17 fall when a 0.16 rise had been expected, from -0.19 previously.

Nevertheless the greenback showed broad-based gains across most pairs.

GBP

The pound weakened broadly on Monday after traders decided to book profits on the recent strong rally, and safety flows dried up following good news on the Greek cash-for-reforms negotiations.

There was no hard data but there was commentary from BOE’ s Sir Jon Cunliffe, who gave a talk on the “productivity puzzle” in which he addressed figures which showed that average worker’s productivity had fallen by 15% since before the financial crisis.

He argued that one possible reason for the drop-off in productivity might be a lack of financial reward or incentive received by workers due to subdued wage growth, and if this were the case than rising pay should begin to solve the productivity puzzle.

However, if this did not turn out to be the case then rising wages married to a persistent lack of productivity would create a output shortfall, which would lead to increased inflation, forcing the BOE to raise rates earlier than planned.

JPY

The bank of Japan maintained its massive stimulus programme and its upbeat assessment of the economy on Friday signalling its conviction that growth will strengthen enough to accelerate inflation to its 2.0% target without the need for more monetary easing.

With business sentiment improving and capital expenditure picking up, the BOJ maintained its rosy assessment that the economy continues to recover. Governor Kuroda said companies are increasingly diverting their strong profits into capital expenditure and wages, underpinning the economic recovery.

Data released today showed that the final estimate of Japan’s leading and coincident indices dropped to 106.4 and 111.0 respectively in April. Preliminary figures had indicated a rise to 107.2 and 111.1 respectively.

Early this morning Japan’s Finance Minister Taro Aso stated that he was closely monitoring the Greek situation and warned that if negotiations between Greece and its creditors collapsed again, it could have a detrimental effect on Japan as well as the global economy.

The yen was trading at 123.37 per dollar in the second half of the New York session.



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