Euro Rebounded Strongly As EU Summit Surpassed Low Expectations

Expectations on the EU summit was so low that when something concrete was agreed, Euro and risks markets were given a strong boost. After a brief dip to 1.2406 against dollar and 98.32 against yen, Euro is now back pressing 1.26 against dollar and breached 100 against yen already. Investors cheered the outcome of first day of the summit with Asian equities broadly higher while European stocks also have a strong open. Dollar and yen were, on the other hand sharply lower with dollar index back below 82 level.

During the EU summit, EC president Van Rompuy proposed to create a single body on bank supervision, involving ECB, and allow banks to recapitalize directly by ESM without involving government debt. Van Rompuy said the measures will break the "vicious circle" between banks and governments. In additional, He proposed that banks complying with EU's budget policies would be about to access EFSF as well as ESM to support their sovereign bonds and lower borrowing costs. Under such arrangement, any country that seeks support will not be subject to Greek-style monitoring and are simply required to meet the budget and deficit commitments. That would also be a simple yet effective way to reduce the strains on Spain's government debt due to bank recapitalization. Italy will also benefit. Also, Van Rompuy announced that EU leaders have agreed on a growth pact worth of 120B euro, including 10B euro capital boost for the European Investment Bank (EIB). Rompuy stated that the growth pact "is a sign of our unrelenting commitment" and "it brings together all concrete measures that we will swiftly take". Germany Chancellor didn't address the specifics of the agreements but said there will be a "successful conclusion" on “future measures within the framework".

A number of economic data were released from Japan earlier today, national core CPI dropped back to negative territory and dropped -0.1% yoy in May. Unemployment rate improved to 4.4%. Household spending rose 4.0% yoy. Industrial production dropped -3.1% while housing starts rose 9.3% yoy. Manufacturing PMI dropped to 49.9 in June. Overall, the data from Japan were mixed. New Zealand building permits dropped -7.1% mom in May. UK Gfk consumer sentiment was unchanged at -28 in June. Swiss KOF, Eurozone M3 and CPI, Canada IPPI and RMPI, as well as US personal income and spending, and Chicago PMI will be released later today.