Dollar Opens New Week on Firm Note

The US dollar has opened broadly higher in the early pre-Asian turnover.  The weekend news stream has been poor.  The euro is now likely to see resistance in the $1.2150 area.  Similar resistance is found in sterling near $1.5630 and the Australian dollar in the $1.0360-70 area.  The dollar may find support near CAD1.0120-30.  The greenback is likely to face resistance in near JPY76.80.  

Three items in particular has weighed on sentiment, which was already depressed at the end of last week as illustrated by some in Spain calling July 20, "Black Friday".

First, more regions are going to follow Valencia's request for government aid.  The Rajoy government had earlier this month set up a 18 bln euro fund to help the regions refinance their debt.  However, in order to maintain a high credit rating, one third of the fund is earmarked as a cash reserve.  This effectively leaves 12 bln euro.  There is a clearly a first mover advantage as the regions have 36 bln euros in debt to be refinanced this year.

Second, Der Spiegel reports that the IMF has concluded that Greece will be unable to bring its debt down to 120% of GDP by 2020 and therefore will not commit fresh funds.  The article claims this leaves Greece in need of 10-50 bln euros, which neither the IMF nor European countries are prepared to provide.   It is difficult to know the veracity of the report as it could be part of the Troika's negotiating tactics, yet after the ECB's decision to suspend acceptance of Greek sovereign and guaranteed bonds as collateral as of mid-week, investors are particularly sensitive signs of Greece getting pushed to toward the exit.  

On balance, a Greek exit does not appear imminent.  However, there are a couple of events to focus on.   Greek Finance Minister Stournaras is to present to the Trokia the package of savings it proposes for 2013 and 2014.  The goal was to find 11.5 bln euro in savings.  Reports suggested than only 7.5 bln could be found.   However, with their backs against the wall, they may sacrifice principle in the form of an cut in civil servant wages and having the Orthodox Church pay at least half of the priests' salary (the government pays it all currently).  

The other date to note is August 20. It is when Greece has a 3.8 bln euro debt payment due. However, the key here is that the funds are owed to the ECB. The Der Spiegel article suggests the ECB might show some flexibility. Remember some 75% of Greek's debt is now in the official sector's hands. The official sector, which is really tax payers, are unlikely to avoid the next Greek default.

Third, Chinese officials seem quite somber about the world's second largest economy.  An adviser to the PBOC has warned that the economy may slow further in the current quarter.  Some investors may be disappointed too that the PBOC failed to ease monetary conditions more.  There were rumors before the weekend that a required reserve cut was imminent.  In addition, the yuan had approached a 1% depreciation from the fix, or official rate on July 20 and its performance today will be closely monitored.  

Lastly, as we noted last week. the South and East China Seas are increasingly becoming potential flash points between China and its neighbors, most importantly presently are Japan and the Philippines.  China has now indicated that it will form and deploy a military garrison for the newly created Sansha council that is to administer the disputed islands of Paracel and Spratly.  The islands claimed in whole or in part by at least five other countries.