ECB Minutes, US Retail Sales and Greek Vote Eyed

European indices are expected to open higher on Thursday, paring losses from the last couple of days, as the Chinese Yuan extends losses for a third day despite Wednesday’s intervention by the central bank. The European Central Bank will release the accounts of last month’s monetary policy meeting this afternoon and we’ll also get retail sales data from the US and possibly the Greek parliamentary vote on its €86 billion bailout agreement.

The Chinese Yuan weakened against the dollar again on Wednesday, despite efforts by the People’s Bank of China to bring some stability back to the currency. The PBOC is believed to have asked state-owned banks to sell dollars on its behalf in the final 15 minutes of trading on Wednesday in an attempt to curb the heavy selling in the yuan.

Clearly the central bank doesn’t want the currency to depreciate too fast and it is more than willing, and able, to intervene in order to ensure this. It’s efforts on Wednesday did work to an extent as the fix on Thursday was set only 1.1% above Wednesday’s, smaller than the 1.6% and 1.9% in the two days previous. We can probably expect the PBOC to intervene more in the coming sessions given that the appetite for Yuan selling is still clearly there.

Perhaps the attempts to stabilize the yuan decline is what’s offering some relief in equity markets ahead of the European open. Stocks have been hit hard by the Yuan depreciation in the last couple of days, particularly those companies that export large amounts of goods to China which have now become far more expensive in a very short period of time.

The ECB will release the accounts of last month’s monetary policy meeting this morning. The report will offer in-depth insight into policy makers views on the economy and what those views are based on. While the central bank is not currently considering a change to its monetary policy, the minutes can offer insight into the pace and longevity of its quantitative easing program when taking into consideration current conditions.

The ECB is expected to continue to buy bonds until at least September next year, despite some suggestions earlier this year that they may pull the plug early. The current levels of inflation would not justify ending the program early and if anything, it’s likely to be extended. The detrimental impact of the Greek negotiations combined now with further exporting of deflation from China surely supports the case for more monetary stimulus. Although, more insight into policy makers views on the latter will have to wait until the next meeting.

U.S. retail sales data will be released this afternoon and traders are going to be tracking this very closely. A number of factors have contributed to Fed rate hike expectations to be pushed back recently including the all-time low in employment costs, as measured by the employment cost index, and the devaluation of the Chinese Yuan. Weak consumer spending has long been a key factor in many people’s view as they display a lack of confidence in the strength of the recovery, while a lack of demand may keep prices and wages low. Another disappointing figure today could further support the view that September is too soon to hike rates.

The Greek government is believed to be preparing to vote on the conditions of the €86 billion bailout today. The bailout is likely to be harsh on Greece again and include more pre-emptive actions by parliament including passing through a number of essential reforms in parliament. There are signs that creditors have eased up a little as well though, with primary surplus targets seen as being more realistic while debt relief and investment in Greece is also likely.

A successful vote today would pave the way for finance ministers to offer their support to the deal tomorrow and the initial funds to be dispersed which will enable Greece to make its €3.2 billion payment to the European Central Bank next week and recapitalize its ailing banks.

It should be noted that this deal is still far from done, even if Greece manages to get the backing for it in parliament, which I think it will. The concerns raised by the German Finance Ministry in recent days are actually quite reasonable, particularly those around debt sustainability and International Monetary Fund involvement. The lack of the latter makes a deal harder to sell to creditor lawmakers. The problem is, it doesn’t seem to be offering a solution.

With the IMF not expected to decide on its involvement until the Autumn, we cannot write off the possibility of a bridging loan. This will not only enable the IMF to decide on its own involvement and parliaments to therefore make an informed decision based on all the facts, it will give creditors time to come up with a solution to the debt sustainability issue. This could resolve two of the three concerns raised by Germany.

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Craig Erlam
Based in London, England, Craig Erlam joined OANDA in 2015 as a Market Analyst. With more than five years' experience as a financial market analyst and trader, he focuses on both fundamental and technical analysis while conducting macroeconomic commentary. He has been published by The Financial Times, Reuters, the BBC and The Telegraph, and he also appears regularly as a guest commentator on Bloomberg TV, CNBC, FOX Business and BNN. Craig holds a full membership to the Society of Technical Analysts and he is recognized as a Certified Financial Technician by the International Federation of Technical Analysts.