Greece talks intensify, BoK to stimulate exports

Forex News and Events

Greece is paying the price of ECB’s credibility

German, French and Greek leaders met in Brussels at the EU-Latin America summit. Once again negotiations, still cash-for-reforms based, have now intensified between Greece and its creditors. Over the last seven years, negotiations have brought Greece to have its Government debt-to GDP to explode to around 180% from 100%. At the same time, it is almost 60% of young people below 24-year-olds that are now unemployed compared to 20% in 2008.

According to policymaker the time is now for making compromises. For example, GDP surplus objectives have been lowered from 4% to less than 1%. In addition, Greece gained time by gathering the €1.5bn payment to the IMF at the end of June. Greece, and Greek people in particular, will be pushed to pay the price of the upholding ECB’s credibility.

Yesterday, Standard & Poor’s downgraded Greek Bonds to CCC from CCC+ with a negative outlook under the euphemistic question whether Greece can pay off its debts. S&P added that Greece will likely default within 12 months. We anticipate the EUR-complex to suffer about those uncertainties. Volatility is likely to increase around each date of repayment.

Regional currency wars heat up in Asia (by Peter Rosenstreich)

In a retaliatory strike against the regional currency strength, the Bank of Korea cut its benchmark policy rate by 25bp to 1.5% (consensus to keep rates unchanged). The rate decisions was not unanimous according to Governor Lee. In the aftermath of the MERS outbreak, which has slowed business activity to a greater extent than expected, consumer confidence has now fallen, and steady export deterioration, signifying the outlook for growth is depressed. Overall the accompanying statement was dovish indicating that the “the downside risks to the domestic growth path forecast in April have expanded”.

However, the primary rationale for the proactive cut was the persistently weak data from the export market. The BoK lowered its view on exports stating that “trend of decline in exports has accelerated”. KRW has been on a 3 year bullish rally against its regional competitor JPY as Abenomics steals growth via competitive devaluation. Data for May exports indicates significant contraction of 10.9%. With exports collapsing the government has re-iterated the need for a weak KRW and concern over neighbors competitive devaluations. Moving forward, while the decision will ultimately be data depended, we suspect that further easing measures will be announced to defend the KRW weakness. That said, we anticipate other Asia regional exports nations to react with counter measures.

Yet, the Bank of Korea easing will be restricted by growing household debt. Cheap credit is fueling the rapid expansion in household debt, which has been troublesome in Koreas past (series of credit bust). While delinquencies have remained low as credit has been going wealthy households. But steady rate cuts has decrease in consumer spending as household look to reduce debt. Clearly, the BoK will also take household debt into consideration in formulating policy.

GBPJPY - Lack of follow-through