ECB, PSI In Focus
The results of the PSI in Greece, due to end later today, and the ECB decision remain at the forefront of markets’ attention. Judging by price action during overnight sessions, it appears investors are comfortable enough that the proceedings will be completed without much incident, though there has been very little fresh commentary on where the PSI currently stands, as conflicting reports have surfaced over the take-up ratio. Nonetheless our working assumption remains that the necessary thresholds will be crossed for the deal to go through, but CACs will need to be activated in due course. This is largely how markets are positioned, but we do not foresee Greece being the key driver for Eurozone developments at this point, and the ECB decision may be able to draw the attention back on growth and financial stability other than the situation in Greece itself. We no longer expect any interest rate cuts from the ECB up ahead, though like any central bank this will be contingent on growth and inflation expectations. At this stage, Draghi continues to adhere to the Brussels line that there is no substitute for austerity, but such adjustment would come at a tremendous cost to growth, and the ECB may not find the room for manoeuvre to respond either on a conventional or non-conventional basis, especially if headline inflation remains at stubborn levels. On that note there was a boost to risk appetite as Iran’s Supreme Leader said it welcomed President Obama’s ‘words on diplomatic window of opportunity’, though the variables are still fluid. Draghi will unlikely commit to the current 1% level as an absolute floor for ECB interest rates, but he will need to address the risks in today’s post-decisions press conference. The RBNZ and BoE decisions overnight both yielded unchanged programmes, and this will be the case for G10 in general as price pressures loom for now, but will most likely be dismissed as ‘transitory’. Otherwise, US claims numbers are due, and we expect the final details of the Greek PSI to be released at around 3pm ET. The Eurogroup will hold a conference call at 8ET and headlines over the swap deal may surface shortly after. EURUSD traded 1.3136-1.3246 and USDJPY 81.08-81.68 overnight.
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UBS Investment Bank