February 19, 2012

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.

February 17, 2012

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.

February 17, 2012

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.

February 17, 2012

AUD/USD falling after US CPI

After being capped just beneath 1.0800 during early Asian session the AUD/USD declined, with an European bounce in the middle.

Stronger than expected US CPI data didn’t have the same effect of yesterday’s risk-on rally on blooming economic data. “The culprit is EUR/AUD which has been absolutely loaded with speculative shorts since the break of 1.29. They are getting squeezed at the moment”, says Adam Button, analyst at Forexlive.com.

According to Mataf.net analysts, resistances are at 1.0800, 1.0845 and 1.0895. On the downside, supports might act at 1.0745, 1.0655 and 1.0625. At the moment of writing, the AUD/USD keeps losing value, now at 1.0725.

February 17, 2012

Berlin split on Greek bail-out

A split has emerged in the German government over whether to grant Greece a second bail-out package with Wolfgang Schäuble, finance minister, pushing to let Athens default while Chancellor Angela Merkel  is firmly against , according to German and eurozone officials.

Mr Schäuble was said to have come to his hardline view in the light of haggling over Greece’s fresh austerity measures under a second rescue programme and the refusal of some Greek politicians to promise to back the deal after elections due in April….

see full article

February 17, 2012


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.

February 17, 2012

USD/CAD falls below 0.9950 after Canadian CPI

By fxstreet.com

The Loonie extended gains against the Greenback, after higher-than-expected domestic consumer price index data helped to lower prospects the BoC might cut interest rates.

USD/CAD dropped nearly 20 pips after the data, sliding through the 0.9950 support and printing a fresh 2-day low of 0.9940. At time of writing, USD/CAD is trading at the 0.9945 zone, recording a 0.2% loss on Friday.

As for technical levels, immediate supports for USD/CAD could be found at 0.9925 and 0.9900, while resistances might be faced at 0.9970, 1.0000/10 and 1.0040.

Canada’s consumer price index grew 0.4% in January and 2.5% YoY, surpassing the 2.3% that was expected. Core CPI climbed 0.2% in the same month and 2.1% over the year, exceeding the 1.9% forecast.

February 17, 2012

Retail Positioning


February 17, 2012

EURUSD – Bullish At 1.3300+


The Euro corrected to my 1.3000/1.2975 target yesterday (as advised in my FX Trading Service to subscribers world-wide) and today I am again bullish on the Euro at 1.3085/1.3070, for the resumption of uptrend toward my next target at 1.3320/1.3350 (eventually much higher!).

February 17, 2012


On Thursday Dollar/Yen resumed increasing with 60 pips. The currency couple appreciated from 78.35 to 78.96 yesterday, not matching the negative Interbank sentiment at almost -14%, closing the day at 78.89. This morning the Dollar climbed further against the Yen, reaching 79.18. On the 1 hour chart the upward channel looks good, while on the 3 hour new upward channel has formed. Break above today’s top and nearest resistance 79.18 would encourage further recovery of the Dollar. Immediate support is yesterday’s bottom at 78.35, and consistent break bellow it could strengthen the Yen further down towards next target 77.50. There are no major economic events for Japan today. Quotes are moving just above the 20 and 50 EMA on the 1 hour chart, indicating slim bullish pressure. The value of the RSI indicator is positive and hesitant, MACD is positive and tranquil, while CCI has thinly crossed up the 100 line on the 1 hour chart, giving over all light long signals.

Technical resistance levels: 79.18 80.00 80.89
Technical support levels: 78.35 77.50 76.62