Pimco the world’s largest bond house believe there is a substantial risk that Greece could default on its debt.

German newspaper Der Spiegel reported that the German Banking Association (BdB) believes Germany’s 10 largest banks would need more than €100bn in new equity capital due to the new regulations.

Portugal reportedly tapped the European Central Bank for €49bn in loans in August.

The Reserve Bank of Australia left interest rates on hold at 4.50% as expected. Governor Glenn Stevens said the bank was comfortable with the current level of interest rates given the economy’s +3.3% GDP growth, 3.1% inflation and cooling Chinese economy.

Julia Gillard has held onto her job as Australian Prime Minister after arranging a Labour led coalition with two independent MPs. Just like the UK after the Conservatives and Liberals formed a coalition, doubts have been raised as to how long it will take before this coalition breaks up and how difficult will it be for the new government to pass important legislation with this tiniest of margins?

Economists in New Zealand believe the Christchurch earthquake could add an additional +1.5% to GDP growth. The ratings agency Moody’s has said they don’t expect the earthquake to put “stress” on New Zealand’s sovereign rating.

The UK number was revised higher by just 0.1 percent which was in line with most forecasts and showed growth in business inventories; a relatively finite factor and one which will not be reflected in the Q3 numbers. Traders and investors are also very wary of the fact that government spending cuts will start to feature in the Q3 figures as well so Sterling failed to make further headway. I guess it is not surprising that the Pound, which has tested the top of its trading ranges against the Euro, Australasian Dollars and Canadian Dollar, should decline before breaking any higher. Although UK traders were not at their desks, there was a smattering of UK data and it was very mixed; a fall in house prices, a rise in consumer confidence and a report from the British Chambers of Commerce that suggested economic growth would average out at roughly 2 percent over the next few years and that UK interest rates would stay low for a considerable time. Compared to a lot of recent forecasts, that is pretty encouraging.

For its part, the Australian Dollar gained a little strength overnight after positive retail sales data was released over the weekend and after it was announced overnight that Australia’s economy grew at its fastest pace in three years in Q2. The strength of Australia’s economy will come as sweet music to anyone migrating to Australia but the increased likelihood of higher interest rates will most likely make the Aussie Dollar more expensive and that is bad news for migrants and those importing goods from Australia. 

The New Zealand Dollar which generally tracks the Australian Dollar had a bit of a scare when Government backed Canterbury Finance called in the receivers. This 85 year old bank is the first in New Zealand to fail as a result of the financial crisis and it took two years of global slowdown for the effects to be felt. Nevertheless, it has caused inevitable concern over whether there may be other problems lurking in the NZ financial system and the NZ Dollar could come under a bit of pressure as this story unfolds. 

The Euro is a tad weaker against the US Dollar but failed to make any significant headway against the Pound. Traders are looking ahead to Thursday’s European Central Bank interest rate decision and, although no one is forecasting any change in the interest rate or the level of fiscal stimulus, it is apparent that the Eurozone is running at two separate speeds. The German and French economies are in a different league to the Mediterranean countries and some of the more recent members of the Euro club; the ECB has a pretty complex task on its hands to balance efforts to stimulate growth in the weaker economies whilst not allowing overheating in Germany and France and maintaining strength and confidence in the EU banking system which is at the heart of the problem. It’s a bit like juggling 16 balls whilst putting on eye makeup and changing clothes behind a beach towel…all at the same time. Bonne chance Monsieur Trichet.

The Canadian Dollar is likely to be fairly inactive until we get the Canadian economic growth data today and the strength of the US economy and relatively well performing commodities will add weight to the case for a stronger Canadian Dollar. The forecasts for GDP growth are pretty positive so Canadian Dollar buyers may want to protect themselves ahead of the numbers.

This week brings a lot of inflation and growth related data from around the world so it should be another lively one; it also sees a return to full trading desks as the schools go back and dads and mums return from their holidays. Higher volume and heightened nervousness will tend to boost volatility so let’s be careful out there.

One of the major movers in the market is the Japanese Yen which the Bank of Japan are attempting to weaken through a combination of an extra 10 trillion Yen being thrown at the market for extra liquidity and BOJ members talking about how uncertain everything is. The extra cash is a 50% increase on the previous total of fiscal stimulus and a very significant move indeed. It begs the question over whether the US, UK and EU will all be forced to follow suit in the months ahead - albeit to perhaps a lesser extent. That kind of activity; specifically designed to weaken the Yen and restore some of the advantage that Japan’s exporters have enjoyed, is precisely what the US and EU have been berating the Chinese authorities for during the last few decades.  The silence over the Japanese move has been deafening.

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The Dollar may well continue in this strengthening path after it broke through and remained below very significant resistance against the Euro. Having closed the week below $1.27 against the Euro, technically speaking, the USD could well make a further three cents of gain without meeting further resistance.  The move to more risk-averse trading patterns does tend to favour the USD as US treasuries remain the premier safe haven as far as international investors and institutions are concerned.

For its part, the Euro is still generally supported by the size and capacity of the economic group but Greece’s debt and problems elsewhere are tending to overshadow any good news coming from the likes of Germany and France.   Traders were very concerned that ECB member Axel Weber, who is normally very hawkish, was calling for the economic stimulus provided by the ECB and IMF to be kept in place for at least another 9 months. If he is worried about the poor potential for growth and perhaps the even more worrying potential for another recession, then we should all be concerned. Today’s data brings purchasing managers indices from around the Eurozone and we get EU inflation later in the week so we may have a bit of an insight into what is troubling Mr Weber.

Sterling remains quite well supported but we have to wonder how long that will last. After several weeks of trying to make more significant gains above the existing ranges, the Pound is still trapped. That suggests the impetus is lacking and when a currency lacks momentum, traders will tend to take profit at the highs and lows of the existing trend pattern. If that is the case here, then Sterling is rising for a fall. This week’s data diary is light but Friday’s 2nd estimate of the Q2 economic growth data has the potential to cause a stir.

Elsewhere, the big news is the Australian election which produced no overall majority. The various parties are doing what is now familiar to everyone in the UK; scrabbling around trying to reach an agreement to form a coalition. Julia Gillard did what Gordon Brown threatened to do when he took over the job of PM from Tony Blair; call an election to gain a proper mandate. Sadly, as it appears it would have with G Brown, it backfired and she is left with the problem of having to water down or give up some policies in order to gain voted from other minority parties. The effect on the Australian Dollar has been muted so far but it does remain vulnerable to changes of policy brought about by political expediency.

The Canadian Dollar is also in the news by proxy really as the bid from BHP Billiton for Canadian fertiliser producer, Potash remains a major talking point. Other bidders may be emerging though so this is not necessarily a straightforward negotiation but if anyone outside Canada buys Potash, the Canadian Dollar has the capacity to strengthen sharply. Beware if you need to buy CAD because this could happen at any time if a deal is announced.

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The property is semi-detached built in 2005 with accommodation on 2 levels plus a roof solarium. It has full air conditioning plus reverse cycle heating. The property is priced for sale at €495,000 For more information visit the Property Direct From The Owner website at http://www.propertydirectfromtheowner.com

The Euro was equally mixed as German ZEW economic expectations fell sharply, suggesting a slowdown in growth over the coming months. Oddly, the Eurozone ZEW survey was a tad more positive than this but that was coming from a much lower starting point after Greek and Spanish nervousness had previously caused a slump in this survey.  However, Euro traders were buoyed by a successful auction of government bonds by Spain and Ireland. You can read all manner of things into the fact that both countries sold bonds with reasonably low interest rates but while the ECB and the IMF are hovering in the wings ready to support Eurozone debt, none of that is surprising. I still have the feeling that EU debt problems are waiting for an opportunity to bite the markets on their bottoms.   

The US dollar had a day awash with data but the surprise rise in housing starts was the item that most influenced the Dollar. A rise to 546,000 units was boosted by the number of small developments being started and builders don’t generally start a project that they don’t feel confident they will be able to sell. Hence the strength in the share markets and a rise in commodities as the markets picked up on that positive vibe. Today’s figures of mortgage applications will either confirm that confidence or cause a bout of profit taking amongst those who perhaps got a bit too enthusiastic yesterday.

Other news releases yesterday included a slowdown in the pace of inward investment into the Canadian bond market. The high levels of inward investment have been a key feature of the success of the Canadian Dollar over the last two years, so a slowdown had to happen eventually. Nevertheless, the Canadian Dollar strengthened a tad after the news. It does though remain near the top of the range it has been in for 12 months with C$ 1.63 at the top end.

The Euro was a little better supported on Monday as a sequence of inflation reports from across the region pointed to higher costs. I am sure traders are not looking for interest rate hikes from the European Central Bank but the certainty that interest rates are not falling was enough to maintain a bit of strength in the Euro. Having said that, the Sterling - Euro exchange rate did manage to test the highest level in months yesterday and remains elevated this morning.

UK inflation data, due for release today, could well show a slight decline from last month but will almost certainly remain above 3.0 percent, well above the Bank of England’s target of 2.0 percent. It leaves no room for the BOE to do anything very much; they can’t hike interest rates for fear of derailing the fragile recovery and they certainly can’t reduce interest rates or expand quantitative easing when their central remit is to maintain inflation at 2.0 percent; something they have been singularly unsuccessful at in the last couple of years. We will find out their take on this issue when we see the minutes from the last BOE monetary policy committee meeting tomorrow. 

Before that though, we get a massive day of data. As well as the UK inflation figures, we get a business sentiment survey from the well respected German ZEW institute and then it is all about the US data. From consumer confidence to industrial production and from housing data to producer prices; it is all kicking off this afternoon. Volatility is assured on the heaviest day for data this week and if the numbers all come in as forecast, the US Dollar stands a very good chance of ending the day more strongly than it started.

That will mean weakness for, amongst others, the Australian Dollar. The release overnight of the minutes from the last Reserve Bank of Australia meeting revealed that they are quite sanguine about the decision to leave interest rates on hold for the 3rd month in a row. They spoke of the fact that the markets had settled down somewhat but warned of further volatility ahead. The Aussie Dollar barely twitched on the widely expected sentiment.

Today’s data diary also holds a couple of gems for the Canadian economy; we expect the inflow of funds to the Canadian government bond market to have slowed a little and manufacturing shipments to have slowed or even declines in the last month. That could give the Canadian Dollar the kick it needs to weaken it off and allow those who need to buy CAD to do so at reasonable levels.

Other currencies hitting the headlines include the Japanese Yen which weakened a little overnight amid rumours that the Bank of Japan was either intervening or hinting that it may do so in order to weaken the Yen and boost exporters’ prospects. With the Yen near a 15 year high against the US Dollar, no one is ignoring the potential for a sharp bout of intervention. The Swiss Franc is also in the news as the top rated safe haven currency. That is causing the Swiss National Bank no end of headaches; especially when they are too strapped for cash to intervene themselves.

Do you feel different this morning? We are in a new world order although you may have missed it in the news. Japan has slipped to third place in the list of the world’s largest economies after China stepped into second place behind America. It still surprises me that Japan is as large as it is anyway when you look at relative land mass but output has grown so fat in China in recent years while Japan has stagnated and that has flipped the placings.

And finally, the high price of gold is helping the South African Rand to maintain a degree of strength. It is unwanted strength though because it does hamper exports from South Africa of anything other than the highly valued gold, diamond and silver exports; all of which are seen as safe haven assets.

The winners of last week, alongside the US Dollar, were the other paragons of safe haven-ness; the Japanese Yen and the Swiss Franc. This led to talk of the Bank of Japan selling Yen in order to try to weaken their currency and give their exporters a better chance of success in overseas markets.  The Swiss National Bank doesn’t have the luxury of funds available to sell the Swiss Franc for the same reasons; they have already declared they are short of reserve funds for such a purpose so more pain is likely for the Swiss exporters. Your Toblerone and Rolex could well go up in price along with your cuckoo clock collection.

Sterling is also seen as a ‘buy’ in this nervous environment more because it has been so heavily sold in the last two years than because of any major love for Sterling. However, the cost cutting measures being implemented by the Clegg-eron coalition are being well received amongst the analysts and forecasters in financial institutions around the world. Tuesday’s inflation data should show a slight easing of pressure and the Bank of England’s minutes, released on Wednesday are likely to show further turmoil within the Bank of England’s Monetary Policy Committee as Mr Sentence is bound to have voted for an interest rate hike whilst the other 8 members are likely to have stood their ground on ‘no change’ to the base rate.

In Europe, the ongoing nervousness over Greek debt, warnings of further problems elsewhere by the International Monetary Fund and others and the general market aversion to risk are all weighing on the Euro. However, the fact that the Euro didn’t collapse when Greece’s economic data showed a larger that forecast contraction, may be seen as quite positive for the Euro. It has certainly not dropped against the Pound beyond €1.22 yet but that could possibly happen this week if the UK data is positive and after this morning’s EU inflation showed a rise to 1.7% on the HICP measure.  This was in line with expectation.

In other markets, the Australian Dollar is weaker this morning but still within the existing trading range against the Pound ahead of tonight’s release of the minutes from the last Reserve Bank of Australia meeting. As you may remember, they left their interest rate on hold and we are keen to know what they see as the path for Australian economic growth and inflation in light of China’s slowing economy and the more negative tone of the US policy makers.

The same could be said of the New Zealand Dollar although that appears to have broken a year long term trend against Sterling and we could possibly be poised for a more significant rise in the Sterling - NZ Dollar exchange rate. It is not certain yet but the fact that we ended last week above NZ$ 2.19 may well be a signal to future direction.

The Canadian Dollar weakened for the whole of last week but found buyers when it hit the top of the trading range it has occupied for the whole of the last year against the Pound. Failure to break above C$ 1.64 marks quite a significant point in the Sterling - CAD exchange rate and if history repeats itself, as it very often does in the foreign exchange market, we should now see a fall back to C$ 1.55 or thereabouts before any further gains can happen in this pair.

The New Zealand Dollar stopped declining for a day after retail sales data showed the fastest quarterly advance since 2007. It reignited the expectation that the Reserve Bank of New Zealand will hike interest rates at their next meeting and the bond markets have raised their prospects of that to 52 percent. A week ago, that was a much lower figure.

The Australian Dollar also stopped weakening as traders became more convinced that the Bank of Japan will take action to intervene in support of a weaker Yen. If they start selling their own currency in order to bring it back to a more exporter friendly level, that will damage those who have bought the Yen as a safe haven, so they are likely to move their funds out into other currencies and the Aussie Dollar is seen as a very attractive option with high interest rates and a relatively buoyant economy.

Today is awash with data. German and French economic growth numbers start us off. They are followed by Eurozone inflation, GDP and trade balance data. This afternoon brings US inflation and retail sales numbers. All have the potential to move the market and the US data almost certainly will. The Federal Reserve’s pessimism is already having an effect across the markets as investors reassess their strategies in expectation of a slowing US economy, so poor data from America will weigh heavily on sentiment and that probably means we will get US Dollar strength as those investors dive into the safety of the US treasury market. On the back of Greece’s poor ‘growth’ data, a poor showing by the powerhouses of Europe, Germany and France, would be very bad news for the Euro itself so, with the Sterling - Euro exchange rate sitting at a precarious € 1.21, we could be in for a break out of the current trading range. If not, traders are likely to take profit and this pair could drop a couple of cents without breaking a sweat.

You will notice the absence of UK data which means the Pound will be shunted hither and thither by overseas events so be wary of assuming anything when it comes to the Pound today.  And let’s not forget it is the last day of the week so short term traders will be tempted to take profit if they are at all nervous and it is Friday the 13th so some traders will be hiding in their beds away from the perils of ….well….. walking about and stuff.

A correction lower in sterling was technically due and we predicted a 5-cent fall in our GBPUSD research paper on Monday from $1.60 to $1.55 so we feel a bit more sterling weakness is likely this week.

The Bank of England downgraded their GDP growth forecast for 2011 from +3.4% to +2.7%, which is still more optimistic than most economists predictions. CPI inflation which has persistently been above the Bank’s 2.0% target is forecast to fall back below the target by the end of next year.

The overall tone of the report was one of caution given the uncertain economic future and certainly dovish regarding future interest rate movements. The BOE is as likely to cut interest rates as they are to raise them at present. It may be until 2012 that we get the first hike in interest rates.

There appears to be little consensus among the BOE members, the most noticeable split being between Andrew Sentence who repeatedly votes for rate hikes and new member David Miles who prescribes more Quantative Easing (QE).

The US June trade deficit blew out unexpectedly yesterday to -$49.9bn from -$42.3bn in May. This was the biggest monthly widening on record and could eat further into the deteriorating US GDP growth outlook.