Euro Surges as EU Leaders Unveil Greek Bailout but Outlook Still Shaky

Key Overnight Developments

• NZ Trade Balance Deficit Widens as Oil Pushes Imports Higher
• Japan’s Deflation Rate Dropped to Nine-Month Low in February

Critical Levels



The Euro surged 0.8 percent against the US Dollar as leaders of the European Union settled on a plan to bail out Greece if need be (see below). The British Pound saw more modest gains, adding 0.1 percent against the greenback. We remain short EURUSD at 1.4881 and GBPUSD at 1.5765.

Asia Session Highlights



New Zealand’s Trade Balance deficit widened for the first time in eight months in the year through February, printing at –NZ$347 million versus –NZ$263 million in the previous month as overseas oil purchases led import volumes by 1.3 percent, marking the first annualized increase in inbound shipments since March 2009. Indeed, excluding oil, imports would have fallen by a hefty 6.1 percent. Exports declined 3.6 percent, led by declines in overseas sales of meat, machinery and dairy products.

Japan’s Consumer Price Index printed in line with economists’ expectations, revealing that annual pace of deflation slowed to -1.1 percent in February from -1.3 percent in the previous month. The report passed with little fanfare despite showing the smallest decline in nine months considering its limited implications for near-term monetary policy after the Bank of Japan doubled its bank lending program to 20 trillion yen earlier this month, saying monetary policy will remain “extremely accommodative” as beating deflation remains a “critical challenge”.


Euro Session: What to Expect



The economic calendar seems entirely negligible in European trade, with a handful of second-tier releases fading into the background as traders digest the outcome of the EU summit in Brussels. The Euro pressed higher after the leaders of the common market unified behind a proposal hatched by Germany and France ahead of the meeting that would involve a combination of loans from the IMF and EU governments to Greece should the administration in Athens ask for assistance in funding its hefty fiscal deficit.

Markets seemed particularly encouraged after the scheme was endorsed by European Central Bank President Jean-Claude Trichet, who had sent markets reeling just a few hours earlier after telling French public television that any involvement from the IMF or other external actors would be “very, very bad”, presumably because it would illustrate that Europe can’t keep their own house in order. Trichet backtracked on those comments by clarifying that he “wanted to preserve the responsibility of the governments of the Euro Area,” adding that the agreed upon proposal assured that this is “respected”. For their part, the Greeks seemed amply satisfied with the outcome, with the head of the nation’s debt agency Petros Christodoulou saying the agreement “wipes out the risk of default” for the southern European nation.

Still, the episode exposed deep divisions within the Euro Zone, with the current knee-jerk rally likely to give way to concerns about what today’s outcome means for the likely approach to dealing with potential future crises in larger member countries. Indeed, the sloppy response to the sovereign flare-up in a relatively small member state like Greece – a mere 2.6 percent of the Euro Zone’s overall economy – invites decidedly unfavorable expectations about the kind of havoc that could be caused should a similar fate befall a country like Spain (11.8% of EZ GDP) or even Italy (17% of EZ GDP).


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