Euro Marches Higher
The euro grinded higher in the European session as Eurozone finance ministers meet at today’s Eurogroup summit. Risk assets were well bid with the euro leading the way higher and the Antipodes benefitting from China’s unexpected weekend decision to cut the reserve ratio requirement by 50 bp. The effect was magnified by the element of surprise. USDJPY scrambled higher to 79.89 but the rally was cut short when the Japanese trade deficit for January came in smaller than expected. Although China’s stimulus measure in itself is limited in efficacy and comes amid ongoing signs of a slowdown in China, the PBoC’s joining of the ranks of major central banks adding to easing will help to further stabilise economic conditions. Meanwhile expectations continue to build ahead of today’s meeting of Eurozone Finance Ministers and the outcome of the meeting is likely to be a defining moment for how risk appetite evolves throughout the week. Germany’s Finance Minister Schaeuble suggested a decision would be made on the ‘whole program’ on Monday and he backed away from the idea of a piecemeal step-by-step approval process that could drag on for several weeks. That’s a promising development. However, Eurogroup Chair Juncker indicated that much negotiation is still needed if full agreement is to be reached by Monday night. The Financial Times reported that the Greek parliament is to vote this week on adding CAC clauses into existing Greek bond contracts. This is likely to be seen as a preparatory step towards an enforced compulsory restructuring should voluntary participation levels disappoint. It also raises the risk that Greece will be downgraded again given S&P has already announced that if legislation is passed to insert such clauses then “we would lower the issue ratings on debt issues concerned to ‘D’ from ‘CC’”. In addition, any subsequent invocation of these CAC clauses would very likely cause CDS contracts to be triggered, although the decision on this point will rest with ISDA. In a further sign of progress towards a second rescue package for Greece, a Greek official announced that the debt swap for private investors would be launched by March 8, with the aim of concluding the transaction three days later. Overnight EURUSD traded in a range of 1.3156-1.3275 and USDJPY 79.35-79.89.
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UBS Investment Bank