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.
Yet another deadline has passed without resulting in an agreement on the terms for establishing a new rescue package for Greece. The 130 billion euro ($170 billion) in emergency funding earmarked for Greece is contingent on the Greek government agreeing to, and abiding by, a program of severe spending cuts to address the country’s chronic overspending.
Patience is wearing thin amongst the “troika” comprised of the European Central Bank, the International Monetary Fund, and the European Commission that will provide and oversee the funding. The mounting frustration was evident in comments German Chancellor Angela Merkel made yesterday before the press in Paris:
“We want Greece to stay in the euro,” she told a news conference. But she added: “I want to make clear once again that there can be no deal if the troika proposals are not implemented. They are on the table, time is of the essence. Something needs to happen quickly.”
Given the markets lack of focus on fundamentals lately, the loonie by all accounts, for a growth sensitive currency is holding its own outright, but for how long? The Loonie has been riding on the coattails of a strong NFP report (+243k and +8.3%) and ignoring its own softer domestic job output print (+2.3k and +7.6%) that supports BoC Carney dovish tone and economic concerns of late.
The market is assuming that the Canadian economy should increasingly benefit as its largest trading partner down south recovers from the recession. Investors are beginning to believe that any positive US data should keep the pressure on for a lower USD/CAD (0.9971). All this from one day out when the market was wondering if the worlds largest economy was slipping back into recession. One stellar NFP print does not make a trend, but it is a start!
Currently, the dollars price continues to lift off last weeks low print of 0.9928. According to the technicals, the daily charts indicate that the loonie is overbought, but selling outright dollar strength seems to remain the order of the day whilst below the four-week trend line (1.0015), risk is lower to 0.9780.
Depending on what Greek rumor dominates the hour, soft Canadian PMI data this morning could have the currency Bulls scatter a period. Its anticipated that the Ivey PMI could come in a tad softer, maybe decline from 63.5 to even below expectations of 58 in January. A softer reading should be able to kick some of this enthusiastic stuffing out of the energetic Bulls on expectations of a dovish turn from the BoC. This will temporarily lead the CAD to under perform the rest of the risk complex.
Greek Prime Minister Lucas Papademos said Greece was close to coming to terms on a deal with Eurozone authorities and its bond holders that would reduce the weight of the country’s debt and still provide access to credit as the government struggles to contain its deficit. In order to avoid default, Greece is attempting to reduce its overall debt load to 120 percent of GDP compared to the current 162 percent.
The rescue plan, which European officials and Greek creditors say may be wrapped up in coming days, includes a loss of more than 70 percent for bondholders in a voluntary debt exchange and loans likely to exceed the 130 billion euros ($171 billion) now on the table.
Recap of the Latest Global News
By Cory Vi & Andrew Su on Jan 31, 2012
Chancellor Merkel indicated yesterday that there may be a delay in finalisation of a debt deal for Greece by saying “we won’t have a thorough discussion of Greece because the troika is in Greece and we don’t have a result of the talks with the banks.” Fundamental cracks are appearing between Greece, where opposition is growing to German led calls for increased oversight and veto powers for Greek budget decisions, and other European leaders. European leaders want to be able to enforce budget decisions on the Greeks while the nation see such moves as an attack on their sovereignty.
President Nicolas Sarkozy of France said yesterday that “Europe is no longer at the edge of the cliff.” The question has to be ‘what has changed since Europe was at the edge of the cliff?” We fear not much. Certainly markets have been less volatile in response to news developments in the new year. However, even as European leaders work towards rules that are designed to bring about greater fiscal union and budgetary control, member states such as Greece want to play by their own rules. The talk is becoming increasingly tough with the the economic spokesman for Merkel’s Christian Democratic Union saying, “The free lunch is over: no external controls, no money.” European history shows that the continent is least united when nations try to exert their influence on each other. Attempts to “unify” the continent have always led to conflagration.
Yet markets have been once again been gripped by europhoria surrounding EU summits and more announcements surrounding plans to save Europe. European Union leaders meeting in Brussels have agreed on a fiscal treaty that will allow for action against high deficit states and calls for members to introduce legislation to limit budget deficits. Markets have rallied on the news even though these reforms actually do nothing to resolve the current debt crisis. Britain and the Czech Republic have declined to sign the pact. The EUR has rallied above 1.3200 after having traded closer to 1.3100 in early Asian trade.
Equity markets have recovered from a soft start to the week with Asian shares rising on optimism surrounding the latest EU summit. After falling yesterday over Greek resistance to outside influence in its budgetary affairs, rising bond yields and the collapse of Spanair, European bourses are now higher by 1% mid session today. After losing ground yesterday for the third day as European leaders lectured to Greece over the nation’s second rescue package, S&P 500 futures are signalling a rise in trade today.
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.
With a trading of 76.69 to 76.87 for the last 12 hours into the day and especially during Asian time, one would question how one can prosper from this currency pair? The answer may that you need to be patient. The FX Market is wary of Japanese officials’ concern about the JPY’s rapid strength and how it is not reflective of the country’s economics but traders expect the chance of intervention would rise if USD/JPY revisits record low of 75.31 and or EUR/JPY falls to around 95.00. With that we think that for the rest of the day it may just trade between 76.50 to 77.11.
