Euro Drags Risk Assets Lower
The dollar gained further ground in Europe, driven by the euro as fears over the situation in Greece have resurfaced. While the market is hoping for a clinching of a debt swap deal today with private sector creditors, securing cross-party support for further austerity measures and securing further funding from the troika is proving far more difficult. While it was initially believed that a deadline of noon (local time) was made to respond to the troika’s demands, the Papademos office said that the only deadline is before the Eurogroup meeting. and so far there appears some distance between where the national unity government lies and the IMF’s targets. The EU Commission summarised the situation well when it said that we are beyond deadlines in dealing with the Greek situation and the ball is in the Greek authorities’ court. Talks continued late into the evening on Sunday and resumed today between the troika and the local authorities. Reports suggest that the main point of contention lies in private sector wage cuts and minimum wage declines, and there are fears that the Greek government will note the country has reached the limits on austerity. At the same time, talks are continuing between private-sector bond holders and the Greek government, which also took place on Sunday. How to secure contribution from official-sector creditors is still in question, as opposition from various quarters remains strong. We believe the week ahead will be extremely significant for event risk and headlines could become a dominant driver for the euro. The ECB will also meet on Thursday, but key matters may have moved beyond their control by the time the Governing Council meets. Otherwise, the market is at least still managing to find some comfort from economic figures. US payrolls surprised strongly to the upside on Friday, with 243k jobs added in January (cons. +140k) and the unemployment rate fell to 8.3%. Our economists have now upgraded their outlook for Q1 GDP from 1.5%y/y to 2.3%y/y, and our year-end unemployment rate forecast has been revised to 7.9% from 8.6% previously, though we note that the decline in labour force participation has contributed to the decline. In figures released overnight, retail sales came in softer than expected at -0.1%m/m (cons. +0.2%), though job ads improved. and German Factory Orders figures were robust. The ECB, BoE and RBA are all meeting on policy this week, and the BoE is expected to decide on an expansion in the asset purchase programme while the RBA is expected to deliver another 25bp in cuts. Overnight EURUSD traded 1.3030-1.3130 and USDJPY 76.50-76.79.
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UBS Investment Bank