- Greek deal leaves markets none the wiser
The response to yesterday’s Greek bailout has seemingly confounded most market participants: those looking for a relief rally in risk have been sorely disappointed – but so have those who were looking for a ‘sell the fact’ response. Price action was testament to the notion that despite the lack of evidence of long euro positioning among major buy-side investors groups, there were enough interbank and other short term speculative longs in place who were happy to book profits as soon as upward momentum faded. Meanwhile enthusiasm for Euros seems tempered by scepticism that the deal has eliminated risk of an eventual default either from implementation failures or unrealistic assumptions about the baseline scenario under which Greek debt falls to 120.5% of GDP by 2020. In the more immediate future, there are still some hurdles to overcome, notably the ratifications required by the Finnish, German and Dutch parliaments before month-end (though we expect these to be largely formalities) and completion of the PSI component of the deal. All in all, the response seems best characterised by a lack a conviction that yesterday’s agreement is indeed the credible book-end to the saga – a response that is fully understandable given the remarkable ability of the Greek Hydra to grow new crisis heads. But if the agreement does indeed end up marking the end of the immediate threat from the Eurozone, this is likely something that will not be known until the completion of the PSI on March 11 or 12. We expect this will involve the activation of CAC’s and a resulting CDS trigger, which could yet be a source of market volatility later next month. But at that stage perhaps we should anticipate a return to the ‘ugly contest’ – the battle of the expanding central bank balance sheets of the ECB, the Fed and the BoJ. The uptake at next week’s ECB’s second LTRO will set the tone for the EUR; while the upcoming housing and employment data will do the same for the US. In the meantime the focus remains on JPY, which this morning has broken the 80 barrier, albeit with little follow-through. We continue to see the top of the weekly ichimoku cloud at around 81 as the key level to watch here.
- Oil the source of new worry warts
Fresh gains in oil prices since the weekend, exacerbated by reports that Iran was struggling to find new buyers for oil being spurned by existing customers, has more observers starting to fret about the growth-sapping connotations of latest strength. News that talks have broken down as IEAE inspectors were denied access to key nuclear facilities can only add to the upward pressure. This may be one reason why commodity currencies most closely allied to oil prices, CAD, NOK and AUD, are failing to get much traction at present. Comments from Norges bank governor Olsen suggesting he was closely monitoring the fact NOK was back to its highs, and independent momentum behind the sell-off in all things AUD may also be relevant here. Indeed, CAD was the least-bad performer of the three on Tuesday. We remain on guard for an extension of the correlation breakdown between commodity FX and oil. Also, note that the strong relationship between OPEC oil revenue and EURUSD (latter supported by reserves recycling) has also broken down.
- ‘Flash’ Eurozone PMIs main data interest Wednesday
As discussed above, Eurozone focus can now return to next week’s LTRO announcement (Feb 29) and then the possibility of additional ECB easing measures being announced on March 8th. Important to market thinking on the latter is Wednesday’s ‘flash’ EZ PMI data (France, Germany, and EZ). Modest improvements are expected (more so in manufacturing than services) in the pan-Eurozone measures. If so, this may be seen as further mitigating chances of a rate cut as early as March, in turn offering some support to the EUR. US existing home sales tops the US calendar (seen improving on December) while BoE minutes will be of some interest, largely the nature of the vote endorsing additional
QE.
BNP Paribas