Currency update - June 21, 2011
 

Investors confident that Greece will get paid

- Confidence vote tonight
- Aussie lower on RBA rate outlook

Good morning. A Mediterranean country with a long history of political corruption faces mass protests from citizens who are rebelling against the prospect of being enslaved to the state for another generation. Is it: a) Libya; b) Syria; c) Greece; or d) All of the above? A west European country looking at the situation has said firmly "This is wrong, it must stop". Is it: a) Britain sending its last three aircraft to bomb Libya; b) Britain texting President Assad to point out that some of his people do not love him at all, especially the ones he is shooting; c) Britain refusing to shovel any more of its taxpayers' money into the maw of Greece's financial black hole; or d) All of the above?

It is not clear how the prime minister would be able to dodge the obligations of Britain's membership of the International Monetary Fund and the European Financial Stability Mechanism. Perhaps he just means he will not increase Britain's existing €5.5 billion commitment to the EFSM. It is evident, however, that there is a high degree of scepticism in Whitehall that Greece can hang on in there for the long haul, whether or not it borrows more money. Treasury Minister Mark Hoban refused yesterday to express faith in the survivability of the euro, saying: "I am not going to comment on whether the eurozone will remain intact or not. Clearly this crisis demonstrates the huge strain the eurozone is under. That is why it was right for us to stay out of the eurozone." His department is apparently preparing a strategy for coping with a Greek default, just in case. The opposition is not sitting idly by either; Labour's Gisela Stuart has proposed to deal with the potential financial apocalypse by cutting VAT.

The scepticism was not shared by the currency market on Monday. Having seen multiple incidents of EU brinkmanship in the past, investors are happy for now to believe that this one, too, will be pulled from the fire at the last moment. They expect Prime Minister Papandreou to win his vote of confidence tonight and to promise to put in place the spending cuts and privatisations required by International Rescue. The view is that it sort of doesn't matter whether spending is reduced or state companies sold off: The EU desperately wants Greece to have the money so, as long as the polite fiction of new austerity measures can be maintained, it will get the cash one way or another.

That confidence allowed equities in North America and the Far East to rally yesterday and overnight. The euro went up, as did the price of oil. Sterling and the Swiss franc, that quintessentially odd couple, gained ground together against the US dollar and the yen. They also edged higher against the Australian, New Zealand and Canadian "commodity" dollars, which failed to match the performance of other riskier assets.

A dearth of data delivered a deficit for Euroland's current account and a -0.4% fall in New Zealand visitor arrivals. The only bombshell was dropped by the Reserve Bank of Australia with the minutes of its June monetary policy meeting. Recent comments by RBA Governor Glenn Stevens had been taken as hints that Australian interest rates would be going up sooner rather than later. Today's minutes appeared to contradict that urgency. The penultimate sentence said that the board "therefore considered that the current monetary policy setting was appropriate". When central bankers talk of a policy rate being "appropriate" they mean they are not thinking of changing it. The news did not go down well with investors, who knocked half a cent off the value of the Aussie.

Today's data agenda is slightly less snoozeworthy than Monday's. UK public sector net borrowing for May will probably be uncomfortably high. The usual importance of ZEW's surveys of German and Euroland economic sentiment will be diluted by the looming vote in the Greek parliament. A -5% slippage in industrial orders is forecast for the CBI Industrial Trends Survey, after a -2% fall the previous month. Canadian retail sales should have risen by 0.4% in April and US existing home sales are expected to have fallen by -4.0% in May.

So it is almost a clear run from here to the Greek vote of confidence at midnight. Was it coincidence or a keen sense of irony that prompted Mr Papandreou to schedule it for the end of the longest day?