ISDA Deliberates On Greece
S&P cut Greece’s sovereign rating to ‘selective default’ during the US session, but the FX reaction was minimal for several reasons. First, the move had been signalled months ago and the timing overnight came as no surprise. Second, the ECB has made it clear that Greek sovereign debt will still be considered eligible collateral even after this downgrade, so there should be no funding consequences for Greek banks. Third, the question of whether a CDS event will be triggered is far more important for markets. ISDA is responsible for deciding on this point, and on Monday announced it has already been asked to issue a ruling on the matter. Before ISDA’s Determinations Committee gets to that stage however, it must first decide if the original request has enough merit to justify considering it in more detail. ISDA is due to decide on this by Wednesday 1700 GMT. If the committee opts not reject the request at that point, a full ruling will follow at a later date. Elsewhere the prospect of a heavy take-up at Wednesday’s LTRO has helped keep risk appetite supported overnight. Our European economics team expects about EUR500 bn in liquidity demand at the tender itself. We would not be surprised to see the euro drift lower once any initial ‘risk-on’ move has run its course. Balance sheet expansion is rarely good news for a currency, and we expect to see increasing market focus on this point. In anticipation, we issued a short EURCAD trade recommendation overnight, partly on the view that CAD is likely to benefit from a risk-on move, while the euro may be held back by the balance sheet dimension. US data today will provide the first read on whether consumer confidence is being harmed by rising oil prices. Both WTI and Brent relaxed a little yesterday but we keep a wary eye on the trajectory of crude, especially given the possible consequences for Fed monetary policy. We very much doubt the Fed is likely to launch another round of QE, but we do expect Fed Chair Bernanke to be quizzed on this point during his semi-annual congressional testimony on Wednesday and Thursday. EURUSD traded 1.3367-1.3478 and USDJPY 80.15-81.61 through Monday.
Click here to read the full report: UBS Morning Adviser Europe
UBS Investment Bank