EU Agrees on Sovereign Debt Write-Downs and EFSF Increases; Euro Rallies above Long Term Resistance

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Risk assets were higher overnight as details from Wednesday’s EU Summit meeting helped push markets higher. The main headline was the IIF agreement to accept a 50% write-down in the outstanding Greek debt held by private investors. The write-down (15% in cash, 35% in bond exchanges) was put in place with the aim of reducing Greek debt to 120% of annual GDP by the year 2020.

The agreement included an EFSF enhancement which would leverage its funding capabilities to 1 trillion Euros. The specific details for how this leveraging would be carried out were not released and apparently have not been decided. The last part of the story involved bank recapitalization, with reserve requirements being raised to 9% by the end of 2012.

On balance, markets have reacted favorably and this is likely to continue in the short term. Further along in the time horizon, however, is another story as significant questions have not been answered (i.e. the exact methods that will be used to leverage the EFSF, or the ways the EU/ECB/IMF will divide their own assumed losses). But for the moment sentiment is being supported, risk assets are making gains and have the potential to run further.

In Japan, the BoJ left held its monetary policy meeting (leaving its base rates unchanged) with the main action being seen in the decision to make policy more accommodative (in purchasing an additional 5 trillion Yen worth of JGBs). Many have argued that this stimulus is insufficient, though, as it only amounts to 1/10 of the program that is already in place. With this in mind, there is little to suggest that this move will have a material effect on the extreme levels that are being seen in the USD/JPY this week. Central bank intervention is a much more likely scenario and because of this, short positions in USD/JPY (especially at these levels) should be viewed as a risky proposition.

In New Zealand, the RBNZ also held its policy meeting and left rates unchanged (at 2.5%). The accompanying statement, however, was a bit of a surprise as the bank appears to be holding onto its hawkish bias. Given the current level of global uncertainty and downward revisions to global GDP forecasts, it is relatively surprising to see a central bank more concerned with inflationary pressures than it is with domestic growth prospects. Macro data will be key going forward to see if growth prospects remain in line with the RBNZ expectations.

This news has been broadcasted through the internet and from what it seems that all about the spread betting explained has been widely introduce to people around the world.

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