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Relief from getting an agreement – attention is now on Italy

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Relief from getting an agreement – attention is now on Italy

Postby Eurusd Trader » Thu Oct 27, 2011 5:35 am

After a 10 hour meeting and well into this morning – after 13 summits and the third promise to deliver a “final” deal on EU debt problems – EU leaders have now persuaded bondholders to take 50% losses on Greek debt and “leveraged” EFSF to 1 trillion Euros. The exact size on the Fund as well as how the leveraging will work is not 100% clear to me at moment.

Key details are missing and some of the techniques on how to leverage the Fund are still missing (the amount could be as low as 800 billion and as high as 1.2 trillion) but markets seems to have shown the element of relief we talked about yesterday. EURUSD surpassed the earlier high of this week – having seen some early falls in NY from traders being impatient or having no faith in an outcome. 1.3992 was the highest I saw before EURUSD retreated back to 1.3960.

IMF is to take a greater role in the total package and Berlusconi is told to get back to Italy and sort out much tougher measures to tackle its 120% debt to GDP ratio. While these efforts which now have been put in place might sort out problems for smaller countries, the 2 trillion Euros of Italian debt is still hanging over markets like a very dark shadow. EU leaders are aware of this and that’s why so much attention has been on Berlusconi over the last few days. He has to deliver.

The future role of ECB in respect of bond purchases is not 100% clear to me. This was a sticking point in the discussions – but as of now it looks like the European Central Bank is to continue its purchasing program as seen earlier this year.

Banking representatives were part of the meeting towards the end as a deal had to be presented as a voluntary haircut – accepted by bondholders. The alternative to that would have been a Greek default – and then things would be really messy.

Many banks will need capital and it remains to be seen how many of them that will stay on as privately owned. For Greek banks it looks like most of them will be in the hands of the State from now on. Greece has been under pressure to privatise much more of business. As of tonight – they have got more public workers.

Weeks of working out details as well as getting formal approvals among the 17 eurozone members remains. Obstacles will arise and while these might cause some market attention – the overall deal reached – is one it will be difficult to back off from.

Critical to me now is what Italy is doing. They have the highest debt burden and they have to do something more dramatically on tackling this problem than what have been seen so far. The whole eurozone is depending on that Italy doesn’t turn into another Greece.

For EURUSD we have seen the predictable relief rally – also to the level discussed in the coaching group last night. Now it is to see whether the details – as we learn them – are enough to cause a sustained move. The rest of this week might be one of relief – as the process of getting here has been pretty tiring.

Watch bond markets and equities for clues to EURUSD also in the future. The tandem moves – as seen for EURUSD and stocks over many weeks – is likely there for a few more.

My own reaction is muted. I like that an agreement has been reached and I think the level of 1.3975 – as seen now – justifies this. I also think the package is good enough to sort out problems among smaller eurozone members. As such 1.4000 could be more in the middle than in the upper part of a range.

But – Italy is the clue to EURUSD from now on and if they don’t perform – then we are into sharp falls for the pair. If they do perform – and quick – then EURUSD sales should cause only limited dips.

“Risk on” and “risk off” will still be an indicator – but from now on more based on other problems than Greece.
In one week G20 leaders meet here in the South of France. Should they like the EU agreement – then there might be further investments and help to come from countries like China. EFSF has yet to sort out their funding base – and oil rich nations like Norway and Abu Dhabi could also be worth talking to.

It was a step in the right direction. To get it approved and sort out all the details are now the next steps. That might be treading water a bit but likely of no other effect to EURUSD that the +/- 250 pips volatility that we have had for some time.

To gain substantially from here, we need to see investors outside EU again praising the efforts. Then EURUSD could be further up – as far as levels seen during the summer.

The clouds of uncertainty will likely prevent EURUSD from moving much higher – but they should not be darker than giving some early strong support levels when dipping.
Its Italy now – which sets the long term direction and levels outside volatility ranges.

That’s as much as I can think so late in the morning. Some sleep might trigger some clearer thoughts for tomorrow. The first test of this agreement we might already see from European stock markets and Italian bonds.

Be cautious and don’t jump on every move.

Have a nice day.
Eurusd Trader
 
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