Euro Breaches 1.30
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. Ahead on Tuesday 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.
Click here to read the full report: UBS Morning Adviser Asia
UBS Investment Bank