Wells Fargo:Commodity and emerging currencies on the rise

Improved risk sentiment is spreading across the FX market, first after China’s PBoC decision of cutting the banks’ reserve requirement ratio by 50bp (from 21% to 20.5%), and secondly as the Eurozone debt crisis seems to be closing a chapter, with hopes of a second bailout decision by the end of the day.

“Essentially, we would expect Europe’s finance ministers to agree to further Greek financing today and leave only relatively minor technical detail to be resolved”, writes Nick Bennenbroek, head of currency strategy at Wells Fargo Bank. “That could see further gains in the commodity and emerging currencies this week, while it might also mean a neutral to slightly stronger bias for the major European currencies as well.

Time For AUD/USD Longs in Risk-On Trade Mode?

Risky assets are higher today, because of cut in China’s reserve-ratio requirement over the weekend by 50BPS to 20.5%, effective from February 24th.

That means that banks are now allowed to lend more money, which of course is good for economy. That’s why we saw a gap higher on commodities, stocks and lower on USD dollar; against the majors, as usually in Risk-on situation.

Finance ministers from the Eurozone are expected to approve a rescue package for Greece today, which is also supportive for the risk trade.

In this week we still favor more strength on FX-majors against the USD since market reversed last Thursday; Euro from 1.2970, Cable from 1.5640, Swiss franc from 0.9300,…

UBS:USD to remain bullish in 2012

US economy continues its relentless recovery as shown by last week’s improved results in the labor market and the inflation data. In the same direction, the Philadelphia Fed man survey (10.3 act. vs. 7.3 prev.) and the Empire State man index (19.53 vs.13.48 prev.) both confirmed the foundations for this wave of economic growth are well placed. Why is this so important for traders and investors in the greenback? Simply, it rules out, at least in the near term, another round of quantitative easing. Reinforcing that conclusion, the FOMC minutes has unveiled that the majority of the voting members were supportive of no more relaxing in the monetary policy conditions.

According to M.Mohi-uddin, Managing Director of Foreign Exchange Strategy at UBS, this week’s reports are also expected to confirm the momentum in the economic fundamentals and to slowly get rid of the idea of more QE in the present year. “That keeps us underlying bulls on the dollar against the major European currencies and the yen”, he concluded.

Greece’s day of reckoning is only the start

Another week and another Greek deadline has come and gone. But EU leaders have vowed yet again that a final decision will come on Monday, and this time they really, really mean it. Except that they’re still working over the weekend on the final details of the accord, so yet another impasse or breakdown could materialize. But we’ll give them the benefit of the doubt and expect that EU finance ministers will approve the second bailout, likely requiring some form of escrow account. Such an arrangement will set the stage for further showdowns in the months ahead, as Greece will repeatedly need to meet deficit reduction targets to obtain subsequent aid disbursements, and their track record there is not good.

While we think the Eurogroup will approve the next Greek bailout on Monday, we can’t rule out last minute hang-ups on key issues, potentially pushing the decision into the March 1-2 EU Summit. Eurogroup officials will meet informally on Sunday night and begin the formal session around 1430GMT on Monday. If they do approve the bailout, we would look for risk assets (stocks and commodities) and EUR to make yet another minor relief rally. Clearly, if they don’t approve of the aid, we would expect risk markets and EUR to come off relatively hard, as the risk of a disorderly default would be intensified. The ultimate deadline to keep in mind is the March 20 maturity of EUR 14.5 bio in Greek government debt.

While much attention has been focused on the question of whether Greece will or won’t receive the second bailout package and avoid a default, we think the bigger risks are from the fallout over the Greek debt swap deal with private sector investors (PSI). In this situation, we are looking at many so-called ‘known unknowns.’ This stems from the credit default swaps on Greek government debt and whether they will be triggered, which financial firms are on the hook for them, and for how much.

The current terms of the PSI negotiations strongly suggest that a ‘credit event’ will be declared, but ultimately that’s up to a committee of ISDA (International Swaps Dealers Association, the CDS and derivatives industry self-regulatory body) to determine. However, reports circulating on Friday indicated that some private creditors were already preparing legal action against the Greek government over the amount of losses they’re being forced to swallow. Friday also saw the Greek government announce that it’s preparing a ‘collective action clause’ law (CAC) for outstanding Greek government debt. CAC’s permit a super-majority of bond holders to alter the terms of existing bonds, making the debt swap deal a non-voluntary affair. Various credit rating agencies have indicated imposition of CAC’s would constitute a ‘credit event’, likely triggering CDS payouts. This brings us back to the known unknowns of which financial firms are liable and for how much, potentially sparking global financial sector upheaval as investors retreat to safe havens. And then there are the ‘unknown unknowns,’ where we don’t know what we don’t know. For many, this is the bigger risk out there, potentially making the fallout from the Greek debt deal make Lehman look like a walk in the park.

Overall, we think a resolution to the Greek rescue drama next week may simply be the start of a larger, messier drama involving previously unentangled financial institutions globally. At the minimum, we would expect a deal on Greece to offer only a short-lived respite, before markets begin to question anew the sustainability of Greece over the longer haul.

As ECB Swaps Greek Bonds “Subordination” Theme Could Hinder EUR Going Forward

By FXTimes

The wheels are in motion as the ECB undertakes to swap out its holdings of Greek bonds. By doing so, it insulates itself against the prospect of collective action clauses being put retroactively into Greek bonds in order to force write-downs on those holdouts in the PSI negotiations.

From Bloomberg: “The Frankfurt-based ECB is exchanging its Greek bonds for bonds of an identical structure and nominal value, the only difference being that they would be exempt from so-called collective action clauses, the officials said late yesterday on condition of anonymity. One said the bonds have a face value of about 50 billion euros ($65 billion).

An exemption from collective action clauses, or CACs, would mean the ECB would not have to participate should the Greek government impose involuntary losses on bondholders. That may occur if not enough private creditors agree to a voluntary swap.”

The ECB paid less for those Greek bonds as they were bought under distress. If held to maturity the ECB would reap the difference between the price it paid for the bonds (around 40 billion euro) and their estimated face value of about 55 billion euro (this figure according to FT), plus interest. That 15 billion euro difference could be used to help push along the PSI deal, or to fill a gap in the funding for the 2nd Greek bailout.

The key issue to consider going forward is that by taking this action to swap its bonds, the ECB is the issue of subordinating other creditors bond holdings, an issue that is applicable beyond Greece.

From Bloomberg: “”The risk of a voluntary restructuring morphing into a coercive one has arguably increased significantly,” Walker said. “It may appear that the ECB is receiving preferential treatment, raising questions about whether the ECB is senior to private sector bondholders, not only in the case of Greek debt, but also regarding the debt of other euro-zone nations that the ECB may be purchasing.

“A private sector bondholder that has been suddenly and unexpectedly subordinated may have a reduced incentive to continue to hold onto that debt,” he said.”

This issue of subordination can come back to haunt the EUR, after the “relief” of Greece getting its 2nd bailout work their way through the markets as it could imply increase pressure on the sovereign bond markets of Portugal, Ireland, Spain and Italy.
The PSI bond exchange could only go ahead once governments authorize the EFSF to provide 30 billion euro to be used in cash or collateral as an incentive to investors. The offer would be open for 10 days (Feb. 22 to March 9), officials said, and the swap formally completed a week before the €14.5bn bond becomes due on March 20, narrowly avoiding a default.

For now, the cautious optimism heading into the weekend that the European nations will not allow Greece to default have extended the gains seen yesterday after it was announced that Greek and the Eurogroup had agreed to extra savings and Greek politicians sent assurances that they would stick to austerity measures even after April elections.

With a holiday in the US on Monday, the EUR may be benefiting from those investors and traders that do not want to be short EUR ahead of a possible resolution of the Greek situation. Things can change if new complications arise, but for now the current signs point to progress on PSI with these most recent moves by the ECB.

USD Lower With Risk Back On

By Forex.com

USD softer against all of the G10 currencies except for the JPY after softer inflation data and amid hopes that the second Greek bailout will get the go-ahead on Monday. U.S. January CPI grew by less than expected with a headline reading of 0.2% m/m from the prior 0.0 (cons. 0.3%) and a core print of 0.2% m/m (prior 0.1%, cons. 0.2%). Global equity markets continue to rise as risk sentiment is supported by an optimistic view that Greece will avert a messy default. European markets are trading to the upside and US stock futures are suggesting a positive start to the day. UST yields are higher across the curve with the 10-yr Treasury yields back above the 2.00% level (currently around 2.02%). The Dollar Index remains inside of its daily ichimoku cloud but is now testing the cloud base after being rejected from the cloud top yesterday. The base of the cloud is just above the 79.00 level and will be a pivotal level on a daily closing basis.

EUR rising on optimism that a Greek deal can be reached on Monday. Italy’s Monti, Germany’s Merkel, and Greece’s Papademos held 3-way phone talks today and said that an agreement on Greece can be reached at the Feb. 20 Eurogroup meeting. ECB members were also on the wires with Weidmann reportedly saying that he did not support the decision to swap Greek bonds for new ones and Knot saying that the “sovereign debt crisis clearly demonstrates that the job is not yet done” but that the crisis is not one of the single currency. In other Europe news, German President Wulff resigned, becoming the second German president to quit in less than 2 years. The news was shrugged off by the markets as the role of the German president is to act as more of a figurehead while Chancellor Merkel handles most decision making. The euro was stronger across the board, most notably against the JPY. EUR/USD rose to test the 200-hour SMA which is around current levels of 1.3180/85.

JPY continues to decline as the market continues to adjust to the recent change in BOJ policy and weak fundamentals. Governor Shirakawa spoke overnight and said that Japan has a long way to go to beat deflation and that there is no ‘magic wand’ to boost Japanese growth. USD/JPY extended its ascent and approaches the 79.50 area which were the highs made in late October after the last round of massive intervention.

GBP slightly firmer after better than expected economic data reduced expectations of additional asset purchases. January retail sales unexpectedly rose by +1.2% m/m (cons. -0.3%) and +1.9% y/y (cons. -0.1%). GBP/USD advanced to current levels of around 1.5830 and sees the key 200-day SMA above at about 1.5915 which should be resistance in the near term.

CAD is higher against the buck after stronger than expected Jan. leading indicators and higher CPI. January headline CPI rose +0.4% m/m from the prior -0.6% (cons. +0.3%) and 2.5% y/y (prior 2.3%, cons. 2.3%) while core prices grew 0.2% m/m from the prior -0.5% (cons 0.1%) and 2.1% y/y (prior 1.9%, cons 1.9%). Leading indicators came in at 0.7% in Jan. (cons. 0.6%). Stronger oil also helped to support to Loonie with WTI crude currently over $103/barrel and up about +1.02% at time of writing. USD/CAD is trading firmly below the 200-day SMA but faces horizontal support around the 0.9925/30 zone which is the key downside pivot.

EUR/CHF

Morgan Stanley sees break in EUR/CHF floor in 3Q when it expects the SNB to let EUR/CHF drop to 1.10 and believes EUR/CHF could hit all-time lows following such a break. Says the SNB’s hardest battle is yet to come and one it ultimately won’t win. “In our view, the biggest reason is that EUR/CHF’s decline stems from Europe, not Switzerland,” say currency strategists at the bank. Notes that while other EUR crosses have rallied, EUR/CHF has stayed still indicating that it will try to fall amid a wider EUR downtrend. “In a real flight to quality, we do not believe the SNB has enough ammunition, short of instituting capital controls, to stop CHF appreciation,” they say. EUR/CHF at 1.2085.

GBP/USD selling pressure awaits at 1.5940/50

By charmner charts

The sterling has followed suit in yesterday’s session and jumped from the zone at 1.5670 to the proximities of 1.5820 on the upbeat news from Greece and the possibility of a swap in the ECB holdings of Greek bonds. Market sentiment shifted to risk-on trade after the first half of the session in Europe, where risk aversion has prevailed, propelling the high-yielders to session highs towards the sunset of the American trading hours.

In the view of C.Harmer, analyst at Charmer Charts, the 1.5820 level should hold well the bulls’ attempts, expecting some selling pressure to drag the cross back to 1.5725/1.5700

“Now, if we do break 1.5840 on the topside we should be able to carry on higher with 1.5880 to 1.5910….If above 1.5910 we see 1.5940/50 but this should be the top and we would expect some strong selling pressure here”, she concluded.

USD/JPY vulnerable above 78.80

By Charmer Charts

The USD/JPY kept adding gains to 78.80, but Charmer Charts analysts advise taking profit there for now: “We are overextended on the short and med term charts therefore any move beyond 78.80 is looking a bit on the vulnerable side”, says Carol Harmer.

On the downside, she says: “We would look for weakness to hold the 78.30/15 support and we would re-enter longs, keeping stops below 77.90”, while after the correction, a move higher will bring the USD/JPY to 79.60, Nov-2011 highs.

Strange Goings On In The Markets

By forex.com

Yet again markets have been fooled by a false dawn when it comes down to the Greek debt crisis. Earlier this week risk was tentatively back on after it was thought that Athens had done enough to guarantee the release of its bailout funds. Then the Eurogroup meeting that was supposed to rubber stamp the deal ended up being a 3.5 hour battle of the wills via teleconference with both the Greeks and the Europeans refusing to negotiate. The final decision on whether Greece gets its next bailout will now be made on Monday.

The Eurozone’s finance ministers are getting bolder in their demands from Greece before they release bailout funds. The Dutch Finance Minister has questioned the expediency of holding general elections in April and suggests a technocratic government a la Italy should be in charge for the next year. Added to this, the Dutch joined the Netherlands and Germany by refusing to agree to release bailout funds before the Greeks go to the polls in two months’ time.

The trouble for financial markets is that once again political risk is coming into play. The Eurozone’s demands have unleashed a wave of patriotism from Athens’ politicians who are trying to save their own hides in the upcoming elections. But on the other side of the fence, European officials have witnessed Greece’s first bailout fail because austerity wasn’t implemented properly and they don’t want to have to explain to their own electorates that they are throwing good money after bad when it comes to helping out Greece.

So now we are at a deadlock with only weeks to go until Greece’s first major bond redemption of the year due on 20th March. How are markets expected to price this type of risk? In the past Greece has always been saved at the last minute, however what if this time is different and the Eurozone cuts Greece loose? How would the markets react to the first ever default by a euro-member nation?

No doubt fear would grip markets, although I don’t believe it would spark a Lehman-like event since central banks globally are already prepared for a Greek crisis and the money spigots are well and truly turned on including at the ECB who offers its next ECB LTRO loans for banks on 29th February.

We believed that potentially the markets may have built up a stronger resistance to Greek issues due to the ECB’s LTRO programme but from a technical perspective the writing was on the wall once EURUSD decisively broke below 1.3080, the early Feb low. Now we are testing the air below 1.30 for the first time in three weeks.

The extent of the sell off is being reflected in EURAUD, which has also clawed back some gains after dropping to all-time lows a couple of weeks ago. This pair tends to recover during periods of risk aversion. In this uncertain environment the Aussie, which has been boosted by some strong fundamental data of late, is following overall risk and stock markets lower today.

The question now is how deep will this pullback be? In the very short term there are signs that EURUSD is starting to look oversold. Thus, we may oscillate around 1.30, added to that there are rumours that 1.2950 is a big barrier level in the market, which could limit EURUSD declines. Upside may be capped at 1.3070 – today’s high. But essentially it’s the bond market that everyone is looking at. Risk only staged its rally once Italian and Spanish bond yields started to fall in recent weeks. So what are bond markets telling us now? Well there are two things to note: 1, yields are rising, but nowhere near the levels they reached at the peak of the crisis last October. 2, Europe’s financially weak states can still sell debt at fairly reasonable rates. For example, Spain sold debt this morning maturing in 2015 and 2019. It was able to attract bids for EUR 4.07bn, higher than the EUR 4.0bn on offer. However yields shot up from 2.86% at an auction earlier this month to 3.32%. This isn’t disastrous, but this increase in yields is worrying so the markets are telling us that the Eurozone isn’t in the danger zone quite yet, but be cautious as risk levels are rising. However, France managed to sell debt at lower yields; it sold 2-year debt with an average yield of 0.89% vs. 1.05% a month ago.

Ahead today US PPI and housing data along with a speech by Fed Chairman Bernanke at 1400GMT may provide a distraction in the markets, but overall Greece is dominating so watch out for negative headlines for Greece and the more ‘political’ the debate becomes the more likely it is to weigh on risk assets.