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    IronFX Daily Commentary | 10/07/15

    10.07.2015, 10am

    Good news all around! Greece seems ready to compromise The Greek government submitted its reform plan to its creditors Thursday evening. The plan includes a package of reforms and spending cuts, such as pension savings and tax increases, similar to the one presented by creditors last month. Signs are that the proposal goes a long way towards meeting their requirements, which is another way of saying that it goes against the wishes of many members of PM Tsiprias’ SYRIZA coalition. Indeed in some respects it may even go further than the proposal that the Greek nation rejected in the referendum last Sunday. The PM can perhaps sell it nonetheless as the necessary price for a new three-year bailout that would avert the collapse of the Greek banking sector and the dreaded Grexit. The big question is whether it can get any debt write-offs, which most participants now seems to agree is economically necessary although many still think it is politically impossible.

    • The reform plan was approved by the Greek cabinet a few hours before the midnight Thursday deadline. Some members of his SYRIZA coalition raised objections that the plan crossed “red lines,” which is a good sign in that it means the Greeks are moving towards the creditors’ positions. It may be difficult for Tsipras to get parliamentary approval for anything that the creditors eventually approve of. He may be able to do it with a different coalition, ie some of his party’s members vote against but the opposition votes for.

    • The country’s creditors now have 48 hours to evaluate the plan before turning it over to eurozone finance ministers on Saturday. They will then decide whether it goes far enough to warrant launching negotiations on a third bailout that could amount to more than EUR 70bn. If they decide that it does not go far enough, then the leaders of all the EU will meet on Sunday to prepare for Greece’s exit from the euro. There seems to be some difference of view between France, which is trying to keep Greece in the euro, and Germany, which appears resigned to having the country leave. Nonetheless, it appears to me that with these concessions on the part of Greece, the odds of Grexit have fallen back below 50%. It’s still possible, but as neither side thinks it is desirable (yet), they may still be able to reach a compromise.

    • People may think that this whole Greek crisis has been a disaster arising from bad planning in the construction of the euro, but actually this is the way the Eurozone was designed to work. Jean Monnet, the EU's godfather, argued that Europe “will not be built all at once, or as a single whole: it will be built by concrete achievements which first create de facto solidarity.” He said bluntly that “Europe will be forged in crises, and will be the sum of the solutions adopted for those crises.” There’s a valid psychological reason for that: “People only accept change when they are faced with necessity, and only recognize necessity when a crisis is upon them.” That may explain why Greece, after voting against concessions to its creditors, might agree only a week later to accept even harsher conditions.

    Resolution of Greek issue could boost EUR/CHF, EUR/JPY If the Greek issue is resolved without a Grexit, then we could expect the euro to rally further, although perhaps not against the dollar, where Fed rate expectations dominate. On the other hand, the safe-haven CHF and JPY might come off as demand for safe haven investments waned. That suggests investors who expect a successful resolution of the talks this weekend should consider buying EUR/CHF or EUR/JPY. Those who expect yet another impasse however might want to consider selling these pairs, particularly EUR/JPY, since the Japanese authorities are less likely than the Swiss to intervene to prevent the cross from falling.

    China stocks continue to rally Chinese stocks continued yesterday’s rally, rising another 4%-5% this morning. That makes a double-digit rise in the last two days. Almost all Asian stock markets are higher as well. Some fund managers are now arguing that with all the government support measures, the worst is now over and the market is a buy. However, I would point out that 1,422 companies or 49% of the number listed are still suspended from trading down only slightly from 1,439 yesterday. I think the government measures may have acted as a circuit breaker, but I think overall the market remains overvalued on a fundamental basis. With momentum traders now nervous about getting in, I think it’s more likely that it resumes a slow decline.

    Risk-off moves reverse With Greece suddenly making concessions and Chinese stocks rallying, the risk-off move of the last few days reversed. Most commodities gained, especially oil, which got a boost on signs that the Iranian nuclear talks would once again miss their deadline. As a result, the dollar lost most against the commodity currencies and gained only against the two safe-haven currencies, JPY and CHF. Whether you think this trend will continue depends on what you think will happen this weekend and in China in coming weeks.

    Today’s highlights: During the European day, we get French industrial production for June.

    • In Norway, CPI for June is coming out. The country’s CPI rate rose to 2.1% yoy in May vs 2.0% yoy in April, close to the central bank’s 2.5% target. Norway’s central Bank nonetheless cut its key policy rate to 1% in June and maintained the likelihood for further cuts, therefore, a decline in the CPI rate could put NOK under renewed selling interest.

    • From Canada, we get the unemployment rate for June. The forecast is for the unemployment rate to rise a bit, and the employment to decline from the month before. The rise in the unemployment rate could weaken CAD at the release.

    • In the US, we get the wholesale inventories for May.

    • As for the speakers, Fed Chair Janet Yellen will discuss the Fed’s economic outlook. This is her first appearance following the June FOMC meeting and just few days ahead of her semi-annual testimony to Congress. We will be looking for hints if the Fed is still on track to raise rates this year.


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