Eurozone agree Greek aid deal, as Carney appointed next Governor of BoE

Tom Tong27/Nov/2012Currency Updates

EUR

Yesterday the world turned its attention to the European Finance meeting as the EU leaders came together for the third time in a week to agree on the next tranche of Greek aid.  The eurozone finance ministers and the IMF agreed on a new debt target for Greece in a breakthrough towards releasing an urgently needed tranche of loans, after 10 hours of talks.

The international lenders agreed to reduce Greek debt by €40bn which reduces it to 124% of GDP by 2020 and that the interest rate on bilateral loans to Greece would also decrease. The reduction of the loans will be from 100 basis points to 50 basis points above the cost of financing once Athens has reached a primary surplus of 4.5 per cent of GDP. 

This deal will allow the major aid instalment needed to recapitalise Greece’s collapsing banks and permit the government to pay wages, pensions and suppliers in December.  The releases are broken down in to 3 different tranches; each of these subject to implementation of austerity programs and economic scrutiny.  The EUR hit a one month high versus the dollar.

GBP

Mark Carney snatched the crown to be named as the new governor of the Bank of England as bookies favourite Paul Tucker was pipped to the post despite Carney ruling himself out 6 months prior.  Reports suggested that Paul was not the right man to set interest rates, keep the economy out of the jaws of recession and regulate the financial system after his involvement in the LIBOR scandal.  Mark Carney is currently serving as the Governor of the Bank of Canada and will replace Sir Mervyn King on the 1st July.  Trading GBP/CAD may now be forever known at the ‘Carney trade’as it touched a two-week high yesterday above all the major moving averages.

The pound strengthened as this bout of unexpected news against the dollar coupled with poor US data; the Chicago fed national activity index show a decline to -0.56 in October from a zero figure the previous month and worse than the 0.18 number previously forecast.

George Osborne the UK Chancellor of the Exchequer said that he thinks quantitative easing has been the right tool for keeping yields down and support demand.  Osborne also said that the Office for Budget Responsibility will publish a separate report with the forecasts for the public finances next week – one set will include the effects of the recent transfer of the QE coupon payments and the other not including them.

Mark Carney is known for his hawkish approach to monetary policy and hard currency inclination; he was unwilling to follow other major central banks into QE.

This morning we await the second estimate of Q3 UK GDP data, expecting to show the economy expanded 1.0%.

USD

The US will release its CB consumer confidence figures; this is set to show an improvement from 72.2 to 73.1 for the month of November.  Weaker than expected figures could spark risk aversion, which could be positive news for the Greenback.  The dollar picked up against all major currencies yesterday but markets and investors remain on edge due to uncertainty over the “fiscal cliff”.  If the agreement isn’t reached in the squabbling US congress among Democrats and Republicans to avoid it, growth prospects in America will be seriously dented – if left unsolved by Congress, this situation could throw the US economy into a recession next year.  Despite this, it could help the US dollar given that it is a safe haven currency purchased during times of market stress.

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Written by Tom Tong

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