Euro Stays Soft After EU Agreed To Speeding Up Spain Bank Aids

Euro remains broadly soft even though EU finance ministers agreed to speed up the bailout for Spanish banks with EUR 30b to be ready for the end of this month. The agreement will be finalized on July 20 after getting approval of member states' parliament. Spain is expected to set up a separate company to manage the assets on the recapitalized banks. The maturity of loans to Spanish banks will average 12.5 years and be eventually taken over by ESM. In addition, Spain will be given an extra year, until 2014, to meet its deficit reduction targets. However, the details of a regional banking supervisory still need to be worked out and might only be completed by the end of the year. A focus today will be on how Spanish yields react to the news.

ECB president Draghi said yesterday that whether the bank will do more after cutting rates to historical low of 0.75%, will depend on the situation, the data and developments. But he emphasized that with inflation rate path moving favorably, last week's cut was a "wise thing." Draghi also noted that ESM direct recapitalization of banks will become operational only when there is supervision in place and that will take time. Draghi hoped to see something by the end of the year and before that, banks could be recapitalized via the EFSF. Even though, use of EFSF would increase the "link between banks and sovereigns," Draghi said that would be "temporary" only and public debt would be replaced by ESM money when it's in place.

In the US, Richmond Fed Lacker said US is "pretty close to maximum employment right now" and monetary policy can't do much more to lower the unemployment rate. San Francisco Fed Williams said that "extraordinary vigilance" is needed and should further action is required, "the most effective tool would be additional purchases of longer-maturity securities, including agency mortgage-backed securities."

In China, the trade surplus jumped to a three year high of USD 31.7b in June. However, import rose less than expected by 6.3% yoy only, comparing to market expectation of 11-12%. Export on the other hand, slowed to 11.3% yoy. The data raised concern on the strength of China's domestic demand. While exports improved, its should be noted that exports to EU has indeed dropped in first half, with exports to Germany fell for four successive month, to France for three months and Italy for 10 straight months. US has replaced Europe as China's biggest export market, but demand is still way below the pre crisis levels.

Other data released today so far saw UK BRC sales monitor rose 1.4% yoy in June, RICS house price balance dropped to -22. Australia NAB business confidence dropped to -3 in June. Japan household confidence dropped slightly to 40.4 in June. UK production, trade balance and Canadian housing starts will be featured later today.