– An agreement is finally reached on Greece, expect EUR to be supported
The Eurozone finance ministers reached an agreement to reduce Greek debt by EUR 40bn, cutting it debt to 124% of GDP by 2020 and to substantially less than 110% of GDP by 2022. To reduce and improve the sustainability of Greek debt, the Eurozone ministers and the IMF agreed on the following measures: (i) to cut the interest rate on the bilateral loans to Greece by 100 bp to 50 bp once Greece achieve a primary surplus of 4.5% of GDP, (ii) to extend the maturities of all loans to Greece by 15 years to 30 years, (iii) to grant Greece a 10-year interest repayment deferral on EFSF loans, (iv) ECB will forego the profits on its Greek bond portfolio, to reduce Greece’s debt pile by a further EUR 11bn, and (v) agreed to help Greece to buy back its own bonds from private investors at a target cost of around EUR 35 cents. The Eurogroup expects to be in a position to formally decide by 13 December, subject to the completion of these national procedures and following a review of the outcome of the debt buy-back operation by Greece. The Greek debt buy-back will occur by 12 December, according Eurogroup working group’s Wieser. Greece will receive up to EUR 43.7bn, of which the December aid tranche will be made up of EUR 23.8bn for banks and EUR 10.6bn in budget assistance. The remaining disbursement will be made in 3 sub-tranches during Q1 of 2013, subjected to the implementation of agreed tax reforms. Although a positive outcome has been pretty much priced into the markets, we expect the EUR to be supported as the deal does remove the tail risk and near-term uncertainty for the EUR. We target EURUSD at 1.33 by year-end.
– Political headlines to influence JPY until December 16; but USDJPY bias remains lower beyond
The sharp weakening move in the JPY over the past two months has been mainly driven by speculative selling on expectations of an aggressive BoJ easing, in our view. As such, the risk remains that JPY trade on the weaker side (against its crosses) into the December 16 election as the likelihood of a more easing-focussed LDP election win looks apparent, according to opinion polls. LDP leader Abe reiterated today that BOJ must set a 2% inflation target, up from its current 1%. He also said that BOJ should be held responsible to achieve not just price stability but job growth as well. Choppy trading in JPY dictated by headlines is likely into the elections. But we believe the markets may be overestimating the ability of the LDP to influence BoJ to ease aggressively. Moreover, while “expectations” of BoJ asset purchases could weaken the JPY, there is no evidence that actual implementation of BoJ asset purchases should see USDJPY rally. We noted that throughout 2003 when USDJPY consistently fell despite hefty JGB purchases by the BOJ and it was only in Q2 2004 when the Fed began its tightening cycle that the USDJPY based and subsequently moved higher. Ultimately lower US yields as Fed enacts open-ended QE (at the December 12 FOMC meet) should see USDJPY lower once again and we look for opportunities to establish a short USDJPY position.
– Carney nomination is positive for GBP
The appointment of the current Bank of Canada Governor Mark Carney to replace Mervyn King as the next Bank of England Governor caught markets by surprise. The initial GBP reaction was positive, and we believe this is justified by Mark Carney’s solid reputation and recent track record. It is worth noting that the BoC has been among the most hawkish G10 central banks. The FX reaction was the opposite for the CAD, given the uncertainty over the next governor. Although it is difficult to measure the possible long-term monetary policy and currency implications of this appointment, at the margin it does support our bullish GBP view. We also remain positive on CAD as the next BoC Governor is likely to come from within the bank and is thus unlikely to deviate significantly from the current policy stance. In an era of open ended Fed QE, we expect GBP and CAD to strengthen, targeting GBPUSD at 1.68 and USDCAD at 0.96 by year-end.
BNP Paribas