Euro Recovers On Solid German GDP, But Vulnerable To Greece Development

Euro recovers mildly against dollar and yen today as risk market recover from recent selloff. Some support is obtained by German GDP data which showed 0.5% qoq growth in Q1 against expectation of 0.1% qoq. French GDP grew 0.0% qoq, meeting consensus. Some consolidations would possibly be seen in the common currency. But overtone is still soft as weighed down by uncertainties in Greece. In addition, things in other peripherals aren't much better. Spanish yield surged through 6.3% yesterday and would continue to be watched. Italian banks were downgraded by Moody's with negative outlook. The common currency is still vulnerable to deeper, and broad based selloff.

In Greece, the left-wing Syriza looks very determined to block formation of any government and push for another election in June. They didn't join the talk with Greek president Papoulias yesterday and said it would join any coalition that supports the EU/IMF bailout with austerity. Papoulias proposed a technocratic government made up of "distinguished and political figures". But that's unlikely to be successful as both Syriza and Democratic left have expressed opposition while Pasok is "optimistic" about an agreement on it. The situation will drag on in near term until a June election is finally called.

After EU finance minister meeting in Brussels, Luxemburg prime minister Juncker said he didn't envisage, not even for one second, Greece leaving the euro area" and said that's "propaganda and nonsense". Juncker also said that Greece exit was not the subject of debate in the meeting. He emphasized that "the Greek public, the Greek citizens, have to know that we agreed on a program and this program has to be implemented." But Juncker also said that if "there were to be dramatic changes in the circumstances, we wouldn't preclude a debate about an extension of the period" to meet fiscal targets.

Moody's downgraded 26 Italian banks to "amongst the lowest within advanced European countries" on "susceptibility to the adverse operating environments in Italy and Europe". The banks are downgrade by at least one notch and for some as many as four notches. All 26 banks are assigned a negative outlook. The rating agency cited that Italy is back in recession and loan demands were weighed down by austerity measures. Banks would be facing deepening loan losses as well as more difficult access to funding. Though, support from ECB has lowered risk of default for many banks.

The RBA released minutes about the rate cut in May, unveiling the policymakers believed monetary easing is needed to stimulate growth. It’s stated that "growth outside of the mining sector was expected to be below trend in the near term, affected by the high exchange rate, softer government spending and subdued conditions in the housing market and building industry". Moreover, "with financial markets remaining unsettled, the risks emanating from Europe continued to cloud the global outlook".

Looking ahead, UK trade balance, Eurozone GDP and German ZEW will be released in the European session. A number of economic data will be released from US including CPI, empire state manufacturing, retail sales, TIC capital flow, business inventories and NAHB housing market index.