USDJPY Pushes Lower
The JPY was the stand-out performer in the European session as it reversed earlier losses in Asia and moved back down to 80.75 versus the dollar. The greenback was generally better bid, in line with a softer risk environment and the euro moved back lower towards 1.34. The news wires were generally quiet in Europe after the G20 meeting over the weekend. The Bundestag is due to vote on the Greek bailout at 14.00 GMT. At the G20 meeting, most global policymakers appeared reassured that the situation in the Eurozone has stabilised and some degree of confidence has returned. With the second 3-year LTRO due later this week, there is no reason to doubt the merits of a tactical risk rally, yet we still question whether the market is making the mistake of ignoring the fact that liquidity is simply a temporary ersatz for much-needed structural adjustment. In addition consensus within the Eurozone on how to proceed ahead remains far from certain, even on the firewall itself, let alone other issues such as the role of official institutions in Greece’s debt swap. France’s finance minister Baroin has just announced he supports the idea of combining the firepower of the EFSF and the ESM. Meanwhile Germany’s resistance to the same proposal appears to be softening. German Finance Minister Schaeuble said Europe would decide on the issue in March – but implied investors should not hold their breath for an announcement. Although an EU Summit has been called specifically to debate this question on Thursday and Friday this week, Schaeuble said a decision would be made sometime in March, but that ‘March has 31 days’. On Friday, Greece formally launched a debt swap offer to private sector bond holders. The terms are in line with newswire reports earlier last week. Bondholders have until March 8 to decide if they wish to participate, and Greece aims to conclude the PSI transaction by March 12. We doubt participation levels will be sufficient and believe the bondholders who hold out against the voluntary agreement will likely be coerced into participating by the invocation of CAC clauses. Restricted or Selective Default ratings would be applied, but it is possible that this will only apply temporarily. The position of ISDA is probably more important in this situation as its declaration of default is needed for CDS triggers. Meanwhile, Oil prices continue to march higher too and Treasury Secretary Geithner, speaking in general terms, said there is a case for tapping the US’ strategic oil reserve in some situations. Overnight, EURUSD traded in a 1.3396-1.3480 range, USDJPY 80.31-81.66.
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UBS Investment Bank