FUNDAMENTAL OUTLOOK at 0800 GMT (EDT +0400)
USD
The euro settled above 1.30 during the US session as investors remain hopeful of a settlement on the Greek PSI. However, reports remain conflicting – a finance ministry source noted that there will be a final offer on the bond swap by February 13th, and the Eurogroup said that current talks on the debt deal were ‘constructive’, but other sources warned that there is currently no intention by either the Eurozone or the IMF to give more money to Greece.
However, there is more talk of a larger firewall for the Eurozone, especially via combining the ESM and EFSF if IMF funding is harder to come by. As a lot of the upside in EUR has come on the back of expectations of a positive outcome, swift unwinding could occur if reports suggest the result is to the contrary. In addition, we are cautious on the wider macro picture as even if the PSI were more aggressive, it is hard to see Greek debt coming down towards sustainable levels, which could complicate troika talks up ahead. Otherwise, activity was limited throughout the Monday session as most of Asia was on holidays for the lunar new year.
Today the dataflow out of Europe will start to pick up, in addition to the Ecofin meetings. German and pan-Eurozone PMI numbers are key ahead of the ECB’s macro assessments, as simply providing liquidity to the banking sector will not be deemed enough as a growth stimulus and further policy measures may be on the way, despite persistent inflationary pressures. Meanwhile, there will be more focus on the Fed’s upcoming decisions, especially the execution of new policy tools such as interest rate forecasts or even inflation targeting. Overall, barring a sudden collapse in PSI talks risk may continue to trade on a buoyant tone due to reallocation needs, but we continue to view this as a temporary respite and will look for good levels to consider entering new euro shorts. EURUSD traded 1.2855-1.3053 and USDJPY 76.87-77.08 on Monday.
EUR
The euro rallied after German CDU budget spokesman Barthle said that running the EFSF and the ESM in parallel is being discussed within the party.. This has been suggested on many occasions in the past however. Back in December, when the leveraging EFSF idea was losing ground, this idea was mentioned by ‘EU sources’. It would effectively create a much bigger firewall if it happened but there are of course many stumbling blocks to its implementation – increased guarantees and potential German constitutional court challenges. However, later during the session the FT reported that German Chancellor Merkel is willing to countenance the combination, in return for even tough fiscal rules.
The details of the Greek bond swap have yet to be finalized, despite further signs of progress. Over the weekend the IIF (Institute of International Finance) gave its most upbeat assessment yet of the current state of play, noting that the elements of an agreement are “coming into place”. It appears that terms have in fact been provisionally agreed between Greece and the IIF, but the plan is now being vetted by the EU/IMF. The Financial Times reported that the EU/IMF have already raised objections to the proposed coupon on the grounds that its perceived generosity would prevent Greece returning to a sustainable debt position. All the signs are that a deal will not now be struck in time for Monday’s meeting of Eurozone finance ministers. There was little news from the ongoing talks in Greece on Mondy morning, although a Greek government spokesman said there was no chance of the debt swap talks failing.
Portugal 5y CDS spread hit a record wide of 1280bp on Monday. Spillover risk from Greece is still high and should there be a coercive restructuring in Greece, markets could well price in the same for Portugal.
The Eurogroup met on Monday but there was precious little to announce as talks are ongoing between Greece and private creditors. Meanwhile, there remain disagreements over the size and execution of the ESM’s size and sources warned that there won’t be any fresh funding for Greece under current circumstances. According to Dow Jones, major creditor funding ‘won’t be increased by a single euro’ but without any decisions on the debt deal at this point, troika talks on the next tranches won’t commence until month-end.
Dow Jones reported that Greece will make a formal offer on Bond Swap by February 13th – and officials noted that the current talks on the debt deal and Greece‘s second bailout were ‘constructive’.
German Chancellor Merkel said that a bridge loan for Greece was not necessary. She also stressed that she ‘will keep fighting’ for fiscal discipline but warned the crisis won’t end ‘from one day to the next’. The Ecofin group of EU finance ministers will meet on today.
CHF
Interim SNB Chair Jordan again signaled the SNB’s determination to defend the floor in EURCHF at 1.20. He said there is “no alternative” to the floor, adding that it will be kept “until it’s no longer needed”. Again he held out the prospect of additional policy measures if deflationary forces rise. Ahead on Tuesday SNB Governing Board member Danthine will be on the wires.
GBP
The MPC’s Adam Posen said he and ‘most of the MPC’ believe that the UK will return to roughly pre-crisis productivity growth trends. He also warned that ‘lack of confidence’ is keeping the economy down and it was right that the BoE conducted QE to stop inflation from falling too low.
Today, fiscal figures will be out with public sector net credit requirement. Fiscal slippage is a key issue for the UK government at this stage and crucial for the maintenance of the AAA rating.
TECHNICAL OUTLOOK at 0800 GMT (EDT +0400)
EURUSD BEARISH Support lies at 1.2839, a move below which would open 1.2734. Key resistance is at 1.3077.
USDJPY NEUTRAL Key upside trigger lies at 77.34 and initial support lies at 76.55.
GBPUSD NEUTRAL Resistance is at 1.5629 ahead of 1.5670. Support lies at 1.5416 ahead of 1.5311.
USDCHF BULLISH Near-term resistance is at 0.9413, a rise through which would open 0.9498. Key supports are at 0.9306 and 0.9244.
AUDUSD BULLISH Momentum is positive; clearance of 1.0496 has opened the way for gains towards 1.0567 and then 1.0753. Support lies at 1.0359.
USDCAD NEUTRAL Key bear trigger lies at 1.0052 while resistance is at 1.0189.
EURCHF BEARISH Momentum conditions are bearish; tough support lies at 1.2000 and resistance is at 1.2133.
EURGBP BEARISH Support lies at 0.8255, a break here would open 0.8222, the Jan. 9 key low. Resistance is at 0.8378.
EURJPY NEUTRAL Initial resistance is at 100.34 ahead of 100.76, a prior low. Support lies at 98.56 ahead of 97.69.
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