EU Steps Up Fight to Stop Crisis

European leaders unleashed a broad-ranging plan to save Greece and stop contaigion from the region's debt crisis. Sentiment turned extremely positive on the news, stocks, commodities and the euro rallied. Australia's import price index will be released in the upcoming session.

Greece was handed 159 billion in fresh aid and the European bailout fund will be given the power to buy periphery debt in the secondary market. This is a wise move by European leaders to chase out shorts in the bond market.

The Greek Marshall Plan calls for EU investments and growth stimulation in Greece. Banks will be recapitalized with an estimated 25 billion via loans to the Greek government. The EFSF will issue loans at around 3.5% and the duration will be extended from 7.5 years to at least 15.

The riskier part of the plan involves cajoling bondholders to rollover debt. This is likely to create a credit event and trigger credit-defaul swaps. Leaders obviously believe this will not generate an adverse reaction but it's far from a sure thing.

As the news leaked out, EUR/USD climbed as high as 1.4435 from 1.4190. Technically, it sparked an outside bullish reversal candle. The close above 1.4309 surpasses the 100-day and the 55-day moving averages.

Oil climbed back above $100 per barrel and USD/CAD broke through support at 0.9445 to the lowest since Nov. 2007.

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The US dollar was broadly lower, mostly on risk appetite but partially because S&P said there is a 50% chance it will downgrade the US to AA in the next three months. They warned that a short-term agreement to boost the debt ceiling without a long-term deficit-cutting plan could cause the downgrade as soon as early August. Under this scenario, they see US long-term yields rising 25-50 bps with GDP growth also cut by 25-50 bps.

They said a failure to reach an agreement would likely shove the US economy back into recession. They think its possible the Treasury could delay other payments and push default beyond Aug. 11. The latest possible date they see is Aug. 15, when $62 billion in interest is payable.

Asia-Pacific Preview

The lone data point on the regional calendar is Australias second quarter import price index. The measure is expected to fall 1.1% compared to the 1.4% rise in Q1. A lower reading will help the case that inflationary pressures are ebbing and put modest downward pressure on AUD.