Still no Greek deal, but optimism remains that debt laden Euro-zone members will avoid a messy default. However, worries over Portugal needing fresh help has managed to temper some of this outright enthusiasm. FX price action has lacked some of that “depth” as Asia has been mostly on hiatus for a second day because of the Chinese New Year. Even the US 2-year bond auction this afternoon will require a concession due to the lack of influential participation.
The Euro group finance ministers meeting ended without any apparent progress towards a deal on private sector participation. Its been reported that the regional finance ministers have rejected the bondholders “maximum” offer and have asked negotiators to consider a coupon below +4%. The deadlines are coming and going and it’s becoming more realistic to expect these round table discussions to drag well on into next month. Apparently, not all has been in vain, ministers supposedly have reached a deal on the ESM treaty, allowing the fund to make loans without “necessarily achieving unanimous government approval.”
With the PSI negotiations ongoing, investors will now have to worry about the background noise as well. Its understood that even with a successful conclusion to the discussions, the actual degree of private sector uptake remains unclear. How can the current bout of market optimism be allowed to sustain such enthusiasm? Many of the weaker shorts have been exposed to the ‘yo-yo’ price action witnessed over the last day. Presently, and until told different, techies eye support for the single currency on dips (sub-1.30) for the moment, believing a break above 1.3073 and we have a ‘new game in town.’
Already this morning, the single currency has again been dragged into positive territory after the Euro-zone PMI releases. The headline rise above the key 50-mark has helped steady spot above the 1.30 size expiries. The composite index has been dragged higher by the better than expected service PMI data, with manufacturing high but failing to break the 50’s. For how long though?
It was no surprise last night that the BoJ cut growth forecasts, while maintaining the policy rate and leaving the QE program unchanged. Policy makers have revised down the country’s growth outlook for 2011 (from +0.3%, y/y, to -0.4%) and 2012 (from +2.2%,y/y to +2.0%) attributing the slowdown in the overseas economy and the retroactive revision of GDP stats. Meanwhile, their inflation metrics remain unchanged, believing that the global financial markets, US balance sheet adjustments and price stability in the emerging economy, all represent risks to Japanese growth. What about the yen? It’s a currency that is likely to “benefit from policy convergence and risk aversion.”
Traders will now be shifting some of their attention span to focus on the two-day FOMC meeting. The Fed may signal that it will keep its easy monetary policy for longer than previously announced. Any indication of this and market will digest it as being dollar negative. If helicopter Ben happens to move that way, the dollar carry trade should become more active.
US Debt Prices on the Back Foot
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