IMF’s Lagarde eases the squeeze on Greece; Euro snaps losing streak

Comments from IMF Chief Christine Lagarde overnight inspired a moderate return to risk after she advocated more time for Greece to rein in their budget deficit, highlighting the risks of doing too much, too soon.  "It is sometimes better, given the circumstances to have a bit more time," Lagarde noted in a press conference. "This is what we advocated for Portugal, it's what we advocated for Spain, and it's what we're advocating for Greece, where I have said repeatedly that an additional two years was necessary for the country to actually face the fiscal consolidation program that is considered." Global growth forecasts released by the IMF earlier in the week show they expect growth to rise 3.3 percent this year, down from July's estimates of 3.5 percent, while revising 2013 growth down to 3.6 percent from 4.1 percent earlier this year. The IMF said "confidence in the global financial system remains exceptionally fragile," while adding "Risks for a serious global slowdown are alarmingly high," citing Europe as a major stumbling block.

Lagarde's comments induced a key inflection point for the Euro, paring back losses earlier this week with a break to the upside of $US1.29 before running out of steam at highs just above $US1.2950. A Ratings downgrade from Standard and Poor's early yesterday initially saw the Euro on the back foot, but positive risk trends in conjunction with the realisation the downgrade may put further pressure on Spain to request a bailout, put the Euro in good stead.  Citing "mounting risks to Spain's public finances, due to rising economic and political pressures,"  S&P downgraded Spanish debt to one notch above 'junk' status from BBB+ to BBB- and placed Spain on negative watch.

Across the Atlantic, the latest US jobless claims provided a sense of solace for investors with the number of US citizens applying for unemployment benefits falling to 339,000 for the week ending October 6, outpacing expectations of 370,000. Overall, it was a largely neutral evening for US markets despite the jobless claims falling to 4-year low, with the S&P500 finishing flat on the day.

The Aussie dollar also maintained its slow grind higher supported by yesterday's local jobs data which showed the Australian economy created 14,500 new jobs in September, in excess of the 5,000 expected. Nevertheless, a rise in the official unemployment rate moderated the upside with the jobless rate climbing to 5.4 percent from 5.1 percent in August. Economist had expected a rise to 5.3 percent. In the absence of local economic feedback, we anticipate regional equity markets will provide the direction in the domestic session with any downside likely to be supported around the 102.4 US cents. At the time of writing the Australian dollar is buying 102.6 US cents.