The Greek political leaders are under significant pressure to reach an agreement on needed cutbacks on Monday to comply with demands from the European Union and International Monetary Fund to secure a second bailout worth €130 billion ($171 billion).
After a meeting on Sunday, Mr. Papademos said that the political leaders agreed on some of the basic points of the international lenders’ demands, including spending cuts equal to 1.5% of gross domestic product in 2012 and reduction of supplemental pension benefits to Greek workers. The most difficult terms, where the government hasn’t yet reached agreement, are wage cuts, labour reforms and a plan to recapitalize Greece’s banks.
Prime Minister Lucas Papademos faces a strong internal opposition to the terms requested by the European Commission, IMF and European Central Bank—also known as the troika. Greek government officials say the reduction in wages being sought by the troika will only deepen the country’s recession and widen its budget deficit, because it will reduce both tax revenues and contributions to its teetering pension funds.
Unions representing both Greece’s public sector and private industry have scheduled a nationwide strike for Tuesday in protest against painful reforms.
CHF continues to rise despite the EUR’s resilience. The SNB’s pledge to hold the CHF 1.20 cap will soon be tested. Since its inception last September it has worked, however, in the past few weeks’ market sentiment has changed dramatically. China considering greater involvement in EFSF and ESM program has done little to support currency so far.
The market has aggressively been playing the risk reward trade at these levels by selling CHF aggressively and waiting for the imminent announcement. The threat of a deep recession in the problem Euro-zone is only making this trade more difficult to stomach. The region has yet to feel the true impact of the implemented austerity measures to reduce their budget deficits. Euro banks tightening their lending policies to both corporate and private interest over the last three months is putting a tighter noose around mainland Europe. The ECB’s increased liquidity policy is not working.
All of this is pointing towards the Euro sentiment plummeting again-CHF and JPY positive. The Franc’s outright performance against the dollar is not exactly helping the SNB. Bernanke’s dovish tone has driven the yield spreads between the US and Swiss even lower and made the CHF more attractive. It seems that all the cross bounces are giving investors better opportunities to own the currency or pare their offside positions outright. Intervention again is the risk, however, the rumored $20+ “yards” of stop-loss orders below the cap figure should be cleaned out if the SNB wants to teach the market an expensive lesson.
Below are some other highlights of the week:
EUROPE
EU: The dollar opened the week much stronger against EM and G10 currencies. The risk selloff started during the Asia session, as markets re-opened after the Lunar New Year holiday.
EU: Italy issues +€7.5b in 2016-2022 bonds ahead of their largest redemption for 2012 (February 1st +EUR25b). The auctions were well received, however, post interest saw the ECB buying product.
EU: Portugeuse 5-year product manages to record the highest yields for the post-Euro era of +22.69%, fueled by the turn of events in Greece. The market perception seems to accept a Greek default as a given.
EU Summit: A leaked German proposal for Greece to cede control over its budget in return for financial aid “casted an uncertain outlook on PSI negotiations.” Market continue to question “the soundness of the recent risk rally.”
WSJ reported that a Greek PSI deal ‘may’ be concluded this week. This of course is subject to Greece securing a new financing program from the IMF and EU.
EU: Mixed European confidence surveys contributed to softening risk appetite at the beginning of the week. Services confidence improved while industrial confidence failed to pick up from the recent lows.
EU: Unemployment in the Euro-zone hits a record high +10.4%.
EU Leaders: They have agreed to accelerate the set up of a full time +Eur500b rescue fund (EMS and EFSF) and backed a deficit control treaty. Initially response saw European sovereign markets responding well to the summit outcome, with Italian 10-year yields reversing about half of the previous sessions rise.
EU: The brief Euro-summit has been viewed as a success relative to modest expectations, allowing the market to eliminate some event risk for the euro system.
GRE: Greece PSI remains elusive and is continuing to generate market anxiety.
CHF: The SNB’s December balance sheet report confirms that policy makers used FX swaps to add CHF liquidity during the course of December last year (+CHF 20b).
CHF: The SNB’s balance sheet also revealed small changes to the FX reserve breakdown by currencies (EUR’s share from +54.8% in Q3 to +52.1% in Q4-in favor of dollars and GBP). At current levels, risk reward favors long EUR/CHF.
UK: The market is looking for QE expansion next week in the UK, mostly on the back of money growth remaining very weak. M4 ex-OFC contracted -0.7%, m/m. Net consumer credit declined -£0.4b, while mortgage approvals at 52.9k disappointed vs. the consensus for 54k.
NOK: Norway’s credit rose +6.7%, y/y, above the consensus forecast for +6.5%. Retails sales growth remains solid in annual terms at +2.6%, y/y. The futures market expects the Norges bank to remain resilient as data support call for rates “on hold” at the next meeting.
NOK: The Norges Bank will purchase foreign exchange equivalent to +NOK350m per day for the Government Pension Fund Global in February. This amount is not large compared to the historical average.
EU: Stronger PMI’s in Europe and China allowed risk sensitive deals to pressure the dollar and yen mid-week.
EU: The Euro-zone PMI was revised a tad higher from the initial estimate to 48.8. Digging deeper, the German PMI was also revised higher, while the Italian PMI at 46.8 printed well above the consensus forecast of 45.3. Spain’s was not to be left behind, its PMI rose to 45.1 from 43.7. The data suggests that the business climate is at least stabilizing in the region, including in the systemically critical periphery countries.
Scandinavia, UK and CE3 PMI’s increased strongly. In the UK perhaps further QE becomes questionable? Swedish and Norwegian prints swung back above 50 (expansion).
CHF: In contrast, Swiss PMI decreased sharply to 47.3. They also managed to report a weak retail sale (annual growth rate dropped to +0.6% from +1.8%).
EU: Consistent rumors that a Greek PSI deal has been struck (with a 72% NPV haircut) has pushed investors to strap on more risk. What about the collective action clauses?
EU: There are reports that the PSI deal is being held up by differences between Germany and the IMF. When the “collective actions clauses” are being enforced we will get to hear more from the disgruntled creditors. The various posturing by interested parties is in danger of making this the worlds longest ‘expected’ announcement.
EU: EU Juncker says that Greek PSI talk are ultra-difficult. The lack of tangible progress in the talks seems to be taking a toll on currencies geared to Europe – CE3, Scandis, ZAR, and TRY.
CNY: Premier Wen has indicated that China is still researching how to participate in the EFSF and ESM program. China supports European effort to stabilize Euro and it may increase their participation via the rescue funds to help resolve the European debt crisis.
CHF: Bernanke’s dovish tone has driven the USD/CHF yield spreads even lower and is making the CHF more attractive. These cross bounces are giving investors better opportunities to own the currency or pare their offside positions outright. Intervention again is the risk.
EU: Spain and France managed to issue bonds, at the front end and in the belly of the curve, to strong investor demand.
GBP: UK construction PMI fell to 51.4 in January from 53.2 (below consensus for 52.5). Manufacturing and services surveys will carry a larger weight for the next BoE meeting (February 9). Analysts are looking for an expansion in the QE program next week based on weak hard data in Q4 and very soft money growth.
EU: The Euro area services PMI was revised fractionally lower from the flash estimate, it now reads 50.4 vs. 50.5.
EU: Greek PSI talks continue, with markets increasingly ignoring statements suggesting progress is being made. Latest reports indicate a deal could be submitted to the EU and IMF over the weekend, and approved at a Eurogroup meeting next Monday.
GBP: The UK Services PMI rose to 56.0 in January from 54.0 in December, the strongest level since March 2011.Next week we get to see if extra QE is to be applied. Unchanged BoE policy or a signal to an end of QE would clearly be positive for GBP as a EUR alternative.
EU: Euro-zone retail sales fell for a second month in December, down -0.4% m/m and -1.6% y/y. Retail sales is again strong proof that the EUR’s 17-nations are threatening to return to recession, if they are not already there. In the 27-member European Union, sales rose +0.3%; largely due to a +0.4% rise in the UK and a +0.7% uptick in Poland.
Japan’s Finance Minister Azumi said that the government will take decisive currency steps if needed and that speculative moves in the currency market are increasing. He and his policy makers can breath a small ‘sigh-of-relief’ after NFP, the market decided to sell the JPY outright! How long is this going to last? These specific market moves are providing better levels to own the currency. Markets have taken the Ministers comments in their stride. Intervention is a rising risk for USD/JPY shorts if the pair falls towards that psychological 75 benchmark. It seems that exporter related sales will continue to cap any upside potential for the dollar. So, fears that the Greek Prime Minister may resign, the uncertainty that the Dutch Government may not want to write down loans to Greece will again make the yen more attractive.
Below are some other highlights of the week:
Asia
CNY: Chinese markets resumed trading following the week-long Lunar New Year holidays. Premier Wen said that the Chinese government will enhance the elasticity of the CNY exchange rate in both directions.
JPY: Japanese Finance Minister Azumi warned against a renewed rise in the yen and vowed to take firm steps against excess volatility and speculative moves in the FX market.
JPY: Japans December IP rebounded +4.0%, m/m, following the -2.7% fall in the previous month (the ‘flood’ knock effect-on from Thailand).
JPY: Yen remains sensitive to G10’s yield compression.
KWN: Korean IP growth fell to +2.8%, y/y in December from +5.8% in November. This is very much inline with soft export growth in December.
SGD: Singapore’s unemployment rate remained at +2% in Q4, despite weakness in IP and GDP growth for the same period. This suggests that the tightness in the labor market is partly structural.
CNY: China’s manufacturing PMI rose +0.2pt to 50.5 (higher than the consensus forecast of 49.6). Importantly, the PMI was much stronger than the seasonal pattern for a -0.7pt fall. New orders up +0.6pt to 50.4 while inventory fell -2.6pt to 48.0. Export orders fell -1.7pt to 46.9 while input prices rallied +2.9pt to 50.0. The data reduces the scope for monetary easing.
KWN: Korea’s CPI inflation fell to +3.4%, y/y, last month (foretasted for +3.6%). Core-inflation also slowed to +3.2%, y/y, from +3.6% in December. Digging deeper, exports fell -6.6% in January (first negative growth in three-years), providing a – $2.0b trade deficit. Note: Asian data may be distorted by the lunar New-Year celebrations.
IDR: Indonesia CPI inflation eased to +3.7% in January as expected. Core-inflation was broadly unchanged at +4.3%, y/y. The futures market expects their Central bank to ease monetary policy further, cutting rates -25bps to +5.75% next week (February 9). Export growth fell to +2.2% in December while import growth surged to +24.3%. The data has narrowed the trade surplus. Is their economy in the first stages of over heating?
TWD: Thai CPI inflation fell to +3.4%, in January (as expected). Futures market again expects the Bank of Thailand to cut policy rates by another -50bps to +2.5% by the end of Q2.
JPY: Comments from Japanese officials are finding it difficult to halt the yen gains. The perception that JPY is one of the most liquid currencies in the world is been seen as a sound alternative to the two prime reserve currencies, EUR and USD. Their stability and debt-led debasement issues are to blame. This would suggest that it’s only a matter of time before the BoJ appears in the markets directly. A similar storyline is being played out in Europe with the SNB.
CNY: China’s non-manufacturing PMI fell -3.1pts to 52.9 in January (less than expected). The HSBC Services PMI was unchanged at 52.5 for a third straight month in January.
JPY: Japan Finance Minister Azumi said that the government will take decisive currency steps if needed and that speculative moves in the currency market are increasing.
INR: RBI’s Deputy Governor Gokarn said that the central bank may buy dollar rupee to inject INR liquidity.
The EUR again has failed to break out of its current range. When its on its knees, down and just about out, Chinese PMI lends a hand in the overnight session. The world’s second-biggest economy has withstood weaker exports driven by the Euro periphery debt crisis and a government-induced property slowdown to give a PMI print of 50.5. A print that still is in expansion territory, no matter if the data may be distorted by a weeklong holiday.
Along with a rise in risk appetite influenced by a ‘whisper’ that a Greek debt deal is imminent, has the EUR testing against its upper range. In truth, it’s difficult to find a diehard Bull amongst us. The market psyche has us believing that most EUR positive moves are supposedly an excellent opportunity to add to the record short positions. These EUR short squeezes are to be treated as an opportunity-no action taken and it becomes a cost! The weak bears certainly hope so.
A successful conclusion to the PSI talks as “promised and expected” will not be the end of the matter-negotiations will remain ongoing. Why? The haircuts being discussed (around 70%) naturally will meet “with very unsatisfactory participation from the perspective of Greek and Euro/IMF authorities for forward looking debt sustainability.” Greece is likely to legislate Collective Action Clauses into the outstanding debt. The objective would be, once legislated, they can be used more coercively to force participation in the restructuring process-In English, whatever is agreed upon, there will be more negotiations required. The nightmare does not end with a successful PSI announcement.
Given that there are so many technical details to be worked out, maybe the market is not fully reflecting the difficulties that are likely to be associated with completing the Greek rescue package. For now, data showing that contraction in the Euro-zone factory activity last month (48.8 vs. 46.9) has slowed is supporting the single currency. Germany remains the outlier, the only country registering a reading above 50, indicating expansion. No matter, investors will wait for the promised Greek PSI agreement before outright celebrating. So, is it buy the rumor sell the fact time now?
The 1.32 EUR handle is in danger of becoming a distant past. Today’s Euro summit could fail to appease investors concerns about the fiscal outlook of Greece. If that is the case, then the single currency price action is on the verge of repeating itself; a pattern of pre-summit gains and post-summit losses.
The Greek economy is only “one” of the Euro peripheries on the brink of deteriorating further into the abyss near term. The country’s own officials are pushing back on Germany’s proposal for Greece to cede control over its budget in return for aid. Without aid from the IMF and EU, a Greek private sector involvement deal is in danger of collapsing this week. Everyday the market is warned of this pending deal, a deal that was supposed to be concluded weeks ago, a deal that still has some Euro-euphoria premium priced in. Further uncertainty will convince the optimists that a near term EUR top may have been already been established last Friday.
The Fitch credit downgrading last week does not make it any easier for some of the struggling Euro nations to come to the table to raise cash. Auctions this week will be the biggest test of sentiment so far this year. This morning, the Italian auction cleared well, with Italy selling +7.5b of bonds out of a total of +8b. However, the ECB were seen post-results; not necessarily good. Italy, Belgium and Spain sell no less than +EUR22b’s worth of debt amongst a credit rating poisoned atmosphere. The pending issues will be somewhat of a litmus test at these much lower-than-before yield levels. The Italian benchmark 10’s (+5.90%) had only recently traded above the markets +7% default barometer.
The Euro-zone economic sentiment rising to 93.4 from 92.8 has only been capable of offering the single currency slight short-term support. The currency seems to want to check out further, the stop-loss orders touted below the bids into the figure at 1.31 option expiry fame. The economic sentiment indicator along with other Euro surveys may persuade Draghi and company to leave monetary policy unchanged at next months meeting as they look to see if the Euro-zone economic activity is stabilizing. Is the EUR top in for now?
Plans for the Greek Private Sector Involvement remain a source of considerable uncertainty for peripheral markets, and the inconclusive result of negotiations over the past few days will leave the EUR and risk complex vulnerable to a large correction. However, the EU economic and monetary commissioner has indicated that authorities are very close to concluding their talks, either later today or over the weekend. Will the market add to the risk trades that have been applied since the Fed, earlier this week, increased its “free money” term length by 18-months? So far it’s been too tempting for the market to refuse and risk is being added accordingly.
The mixed signals from the Euro-zone debt market means investors need to tread with caution. Thus far, ECB liquidity has boosted demand for Spanish and Italian debt. The same cannot be said for Portugal. Peripheral bond yields have resumed their collapse this week, with Italian 10-year yields down -18bp to +5.84%, a long way from that +7% imploding benchmark. Portugal remains the outlier, with yields still under upward pressure. Perhaps if China invested in Europe we would not care so much?
Below are some other highlights of the week:
EUROPE
EUR: Greek talks were expected to show something of substance last weekend. Not unexpected, this week began with Greece failing to yield agreement on the public sector involvement. Negotiators have been squabbling over the coupon that restructured bonds will carry.
EUR: The single currency opened lower in the Chinese New Year and despite all the negatives, soared through last weeks highs allowing the techies to start talking about outside weekly reversals as the currency remains elevated.
EUR: Analysts expect that even a successful conclusion to discussions would still leave the actual degree of private sector uptake unclear. EUR bears are still looking for that top, as default risks will not fully ‘abate’.
FRF: French January business confidence surprised weak, falling to 91 from 94. The market had been expecting a small uptick, especially after the German IFO and EU PMI prints.
EU: Portuguese debt worries have resurfaced to add to Greek default concerns.
S&P’s Chambers: Greece ‘In all likelihood’ is down to a selected default. However, this default is not expected to destroy the credibility of EMU.
EU: Euro-zone flash PMI’s came in firmer than expected with the composite back above 50 after four-months in contraction territory. This suggests that the region ‘should avoid a collapse in output’ and another quarter in the GDP ‘red’. Manufacturing PMI rose to 48.7 from 46.9 and services PMI rose to 50.5 from 49.0.
GER: Their numbers were strong with manufacturing PMI at 50.9 and services PMI at 54.5. Big picture, data should help the Scandis and CE3 currencies.
ESP: Spain saw strong demand at its bill auction. Spanish Treasury sold +EUR2.51b of 3-and 6-month bills. The bid-to-cover was high in both issues.
EU: With Greek PSI negotiations inconclusive, the IMF is pushing for the ECB’s to take a haircut along with PSI as a means of distributing losses back to governments. However, the ECB and German coalition remains opposed to taking a loss on ECB holdings. Expect the heavy peripheral issuance schedule to remain a key factor in keeping the bulls on their toes.
GER: German ifo surprised higher with the expectations component at 100.9, above the consensus for 99 and up from 98.6 previously (the third consecutive rise) and suggests a GDP growth rate of +0.5% q/q.
GBP: UK GDP contracted more than expected in Q4, down -0.2%, q/q, vs. -0.1%. The weakness was driven mainly by soft industrial production in October and November and poor services at the start of the quarter.
GBP: BoE minuets deferred the decision on more QE until next month, as expected. The assessment on the economy was somewhat less pessimistic as members judged the most serious downside risks have abated. However, others understood that the “risks of undershooting the target meant an expansion of the QE program is likely to be required”.
FOMC: FX risk has rallied following the Fed’s shift to a more dovish policy stance. With US yields holding on to post meeting losses and pricing of tightening being pushed further out in the future has increased the appeal of EM FX.
HUF: Hungary sold HUF +48b worth of bonds (+13b more than expected). This would suggest that market perception of HUF risk has improved. PM Orban has softened his stance on recent legislation and indicated that he is willing to adjust their policies in order to win financial backing from the EU and IMF.
SEK: Manufacturing confidence surprised soft, falling to -14 vs. -11. Analysts believe that weak growth and the recent sharp moderation in core-inflation allows for a rate cut by the Riksbank at the next meeting.
EU: Peripheral bond yields have resumed their collapse, with Italian 10-year yields down -18bp to +5.84% (Friday Morning). However, Portugal remains the outlier with yields still under upward pressure.
EU: On Friday, Rehn indicated that PSI talks are very close to conclusion, either today or over the weekend.
EU: Euro area M3 growth has slowed significantly to +1.6%, y/y, from +2.0%.
CHF: Swiss KoF leading indicator dropped to -0.17 this month from +0.01 in December (ninth consecutive monthly decline and the first negative reading in two years). However, the release is at odds with the recent upward surprise in the PMI back above 50.
Fitch: Downgrades Belgium, Italy and Spain.
PLN: Poland recorded above consensus 2011 GDP growth of +4.3%, y/y.
Should continue to attract foreign capital and support the PLN.
Other regional data and policy innovation has mostly been positive for the Asian region this week. The Fed’s surprise extension of its commitment not to raise US rates for another 18-month’s, until late 2014, “should be the key to medium-term development”. Yen is expected to be the natural beneficiary of the latest dovish rhetoric by Bernanke and company and monetary easing by other G10 members. The lack of attractive yield opportunities complicates Japans current account recycling efforts. The stronger than expected Euro area flash PMI’s this month should be Asia’s strongest macro support (it suggests that the regions exports have ‘bottomed out’). Analysts historically use this indicator as a bellwether for Asian currency appreciation.
Below are some other highlights of the week:
ASIA
CNY: Chinese New Year of the Dragon begins.
AUD: Because of the Chinese Holidays, markets down-under were vulnerable to illiquid pockets this week.
AUD: The IMF has warned that Aussie banks might need “tougher capital requirements.”
JPY: It was no surprise that the BoJ cut growth forecasts at this weeks monetary meeting, while maintaining the policy rate (+0.05%) 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 to the overseas economies and the retroactive revision of GDP stats.
JPY: 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 continue to “benefit from policy convergence and risk aversion.”
INR: The RBI held the repo rate unchanged at +8.5% (as expected), however, they unexpectedly lowered the cash reserve ratio to +5.5% from +6.0% (It’s first ease in nearly three-years). Analysts expect this to add approximately +INR320b into the economy.
INR: The RBI also revised this years growth forecast lower to +7% from +7.6%.
AUD: Australia headline CPI was flat in Q4 (forecasted for a +0.2%, q/q rise) due to a sharp fall in fruit prices. The RBA’s trimmed mean measure of CPI inflation was +0.6%, q/q, and the weighted median was +0.5%. Both are running at +2.6%, y/y, after some upward revisions to Q3 numbers. However, with core prices in the middle of RBA’s +2-3% target band suggests further easing is not required just yet. The market expects the RBA to cut rates +25bps because of Euro woes.
JPY: Japan’s December’s trade deficit rose to -JPY567b, pushing the 2011 trade balance into a deficit of JPY2.5trn (the first annual trade deficit in 20-years). Analysts expect this trend to continue for 2012. Euro uncertainties and global central banks monetary easing will continue to make it hard for any current account surplus to be recycled offshore. With repatriation of overseas assets remaining strong, the currency should remain under pressure longer term.
PHP: Philippine imports remained at a high, +$4.9b in November, pushing the trade deficit -$0.7b wider to -$1.6b. Remittances continue to support the PHP and a current account surplus. Expect policy makers to remain reluctant to allow their currency outperform in the region.
SGD: Singapore CPI inflation was at +5.5%, y/y in December, in line with the consensus forecast. Inflation is expected to remain high through the next one to two quarters. This scenario would suggest that the MAS to maintain the SGD on its current mild appreciation path.
FOMC: FX risk has rallied following the Fed’s shift to a more dovish policy stance. With US yields holding on to post meeting losses and pricing of tightening being pushed further out in the future has increased the appeal of EM FX.
KWN: With EM Central Banks more active in reducing the appreciation of their own currencies, the BoK is supposedly restricting KRW appreciation to about five won per day.
NZD: RBNZ remains on hold at +2.5%, as widely expected. No rate move is priced in until Q4.
KRW: GDP growth slowed to +3.4%, y/y, in Q4 vs. +3.5%. The underlying details were soft, with domestic demand and investment continuing to be weak. Net export growth also slowed.
SGD: In Singapore IP rose +12.6%, y/y, in December, much higher than the consensus forecast of 6.4%yoy. The MAS is expected to keep the SGD on an appreciating trend.
KWN: Korea’s manufacturing business survey rallied +2pts to 81 in January, and still below the expansionary level of 100. Analysts expect the index to rise in line with the recovery in global PMI’s. This would suggest stronger export growth and support for the won.
NZD: New Zealand recorded a trade surplus of +0.3b in December, this after four consecutives months in the red. This was achieved on the back of increased dairy exports. In December exports rose +13% while imports fell +1.6%. For 2011, the trade surplus was largely flat at around +1.1b. Expect further Kiwi appreciation to hurt exports. Governor Bollard at the RBNZ said he is comfortable with the current market pricing of no rates hike for the year ahead.
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.
What ever happened to the Greek haircuts? Market perception saw it as a done deal, where further details were supposedly forthcoming over the past weekend. According to the IIF, negotiations are ongoing and elements of an unprecedented voluntary PSI are coming into place. However, reports suggest bondholders have drawn “a line in the sand” regarding their maximum offer. That cannot be a market surprise. It’s now unclear whether an outline deal would be ready for approval by the Euro-zone finance ministers meeting today. It was the original deadline set by the Greek finance minister. Whatever happens, Euro ministers will decide what terms of a Greek debt restructuring they are ready to accept as part of a second bailout package later today.
Confused signals suggest range trading rather than a strong “directional environment” for the markets short term. It’s been a battle for both the techie’s and fundamentalists of late. With the EUR’s one directional play, the single currency has been capable of posting bullish reversal signals outright and against the JPY (two of the most crowded trades). However, declining volumes on rising prices should concern the bulls. It’s usually referred to as a bearish indicator.
For the ‘bigger picture’ individual, the overall EUR risks may not dampen the bullish enthusiasm of late. Even Greece’s failure to agree with the PSI may increase “headwinds” for the currency, wider market sentiment should remain somewhat supported by the possibility of an increased ESM bailout facility and growth signs in the US.
The currency is proving more resilient than many had expected. With the regular stops and offers in place ahead of the psychological and mid-term target of 1.3, the market again will be focusing on the meet in Brussels today. Already this morning, German comments on the possibility of running the ESM and EFSF parallel, is supporting the EUR. The strong German debt auction result is pushing the market to test this option barrier, offer laden 1.3 level.
