The Countdown To The Eurozone Finance Ministers’ Meeting

At 1530GMT/ 1030 ET Europe’s finance ministers will meet and hopefully agree that Athens’ latest austerity efforts are good enough for them to receive their second bailout from the IMF/ EU and ECB. But as we start the European session we are seeing a bit of a pullback in risk after a strong start during the Asia session.

Right now this is a very normal pullback. The US is out on holiday today and as we enter European trading hours headline risk has massively increased, so investors are booking profits where they can. This has seen EURUSD back away from 1.3240 high and AUDUSD climb down from 1.08, although uptrends remain intact. While the markets lie in wait for the Eurozone finance ministers’ meeting later this afternoon we need to take our cue from the technical signals. In EURUSD any pullback to the 1.3150 level is normal, but below there then the fundamental back drop is likely to have changed for the worse (negative headlines from Greece or the Eurozone’s finance ministers’ meeting).

The outcome of today’s meeting is likely to define the performance of risk assets for the rest of the week. Right now the markets are not priced for an outright collapse of talks between Greece and the Eurozone finance ministers, but there are still many hurdles on the road to Greece paying its EUR14.5bn bond redemption payment on March 20th. Even the chair of the Eurogroup Juncker has said that ‘much negotiation’ is still needed.

Firstly at this meeting the PSI deal is expected to be agreed, the ECB’s position regarding the debt swap is also expected to be formalised and the Eurozone authorities need to be happy that Greece will implement the harshest austerity measures yet and will stick with its bailout conditions regardless of the outcome of April’s elections.

The PSI discussions took an interesting turn at the weekend. It was announced that the ECB would participate in the bond swap with Greece, but it would not face Collective Action Clauses (CACS), unlike other holders of Greek debt. Essentially European authorities can force losses on private bond holders but not on the ECB. I wrote about this yesterday and quoted Pimco chairman Bill Gross who said that this threatened the integrity not just of Greek bonds but of bonds across the entire Eurozone. But this has fallen on deaf ears this morning and Italian bonds have opened higher this morning (yields lower). Even Portugal, which has been targeted as the most at risk Eurozone nation after Greece, has seen its bond yields fall this morning. Thus, if today’s meeting finalises the details of the PSI negotiations then the market may concentrate on the CAC/ no CAC ECB debate, which has the potential to dampen sentiment.

There is also some confusion over whether Greece will get all of its bailout funds or if funds will be withheld until after the April elections. This is the line of action being pursued by the Dutch authorities. The other option is that a portion of Greek bailout funds are placed in an escrow account so that they are used to pay bond redemptions and can’t be used to fund public spending. This would limit Greece’s sovereignty over its own budgets, but would reduce the risk of a third or fourth bailout somewhere down the line.

So the discussions this afternoon could be long and messy and we don’t know for sure if Greece will get the funds it needs. But for now the markets believe it will hence the bullish tone to markets this morning and asset classes are moving higher in unison.

The China RRR cut on Saturday helped to boost sentiment during the Asia session as yet central bank pumps liquidity back into its economy. The US is out on holiday today and US stock markets are not open, so expect the emphasis to be squarely on Greece later.

By FOREX.COM

Euro Flip-Flops on Greece, Sentiments Boosted by China Elsewhere

Euro continues to flip flop against dollar with a soft tone on news from Greece. On the one hand, it’s reported that the EU group meeting will be replaced by a conference call as final details regarding the Greek bailout plan are not yet ready. According to Jean-Claude Juncker, the change was due to the situation that ‘there weren’t sufficient elements of consensus to be sure that a meeting would be successful’. He also noted he has not yet received the required political assurances from the leaders of the Greek coalition parties on the implementation of the program. On the other hand, after the change on the EU meeting, it’s reported that political leaders from Greece would promise to implement the austerity Wednesday. The news helped DOW staged a late rebound to close nearly flat and set the stage for strength in Asian equities.

In Asia, sentiments were generally lifted as China pledged to invest in European bailouts. Chinese Premier Wen Jiabao said yesterday at a joint press conference with EU President Van Rompuy that “China is ready to get more deeply involved in participating in solving the European debt issue.” This is echoed by PBoC Governor Zhou xiaochuan today as he said that “China will always adhere to the principle of holding assets of EU sovereign debt” and “would participate in resolving the euro debt crisis”. This is seen as a commitment from China that at least it won’t be cutting European bond holdings and would instead look for opportunities to invest more.

Data released today so far is positive with New Zealand retail sales rose more than expected by 2.2% qoq in Q4 while Australia Westpac consumer confidence rose 4.2% in February. A number of key economic data will be released today included Q4 GDP data from Eurozone countries, UK job data, BoE inflation report, Swiss EW, US manufacturing data as well as FOMC minutes. Be prepared for a busy ride!

RBA only temporarily on hold, fade AUDUSD rally

By UBS

The AUDUSD at 1.07-1.08 looks overdone, says Mansoor Mohi-uddin, Head of Foreign Exchange Strategy at UBS Macro Research, who thinks along the UBS Economics experts lines that at least one more rate cut by the RBA will be seen.

UBS makes this call based on “next week’s January payrolls data likely to show Australia’s unemployment rate ticking up to 5.3%, the latest Chinese data showing higher than expected inflation but lower than expected bank loans growth and the Australian dollar still remaining at high historic levels. This risk is compounded by Australian banks this week announcing they were raising their mortgage rates to consumers.”

As a result of UBS concerns about the overvaluation of the currency, the bank issued a recommendation to buy a three month AUD put/USD call option with a strike at 1.03, expiring 4 May 2012 New York cut. The cost was 1.56% of face value and the spot reference price for AUDUSD at the time was 1.0725.”

Eyes Turn To The US Jobs Data

The euro fell after China released worse than expected Non-Manufacturing PMI figures during the Asian session. After the German Chancellor’s visit to China, Chinese Premier said that China is considering a greater involvement in the EFSF and ESF channels. A successful bond auction from Spain helped the euro after Spanish bond yields fell below 5%. Against the greenback, the single currency fell to 1.3085 and later it rebounded to 1.3186. Versus the Swiss franc, the single currency edged higher today to 1.2060 after the Swiss National Bank Chairman said that the central bank is ready to act in order to defend the cap of 1.20 francs to the euro.

The US dollar appears softer today as the market is expecting the US Non Farm Payrolls data. Investors expect data to show that the US economy created 150 thousand jobs in January down from the previous month’s 200K. The unemployment rate is expected to remain unchanged at 8.5%. Federal Reserve Chairman Ben Bernanke testified before the House Budget Committee yesterday and his dovish tone weighed on the greenback. He said that the economy has shown some signs of improvement but the pace still remains frustrating slow adding more on speculation for a third round of quantitative easing. Versus the Japanese yen, the dollar is still hovering above key levels falling as low as 76.04 and with the US jobs data due later today concerns for an intervention by the Bank of Japan are heightened.

The Australian dollar dropped against the greenback today after poor data from Australia’s largest trade partner, China. Chinese non manufacturing PMI dipped by more than expected in January weighing on demand for riskier assets. The pair rose to 1.0671 from 1.0756 traded yesterday.

Oil prices fell sharply to 95.40 dollars a barrel from 97.95, a decline of 2.6%. Gold edged higher to 1761.00 dollars an ounce from 1741.10. Silver also edged higher to 33.38 dollars an ounce from 33.45.