No weekend deal on the Greek PSI+ hits EUR but AUD & NZD rally continues unabated
A deal has yet to be finalised over the terms of the Greek PSI+ following weekend discussions with private bond holders. Private owners of Greek debt have made their “maximum” offer for the losses they are willing to accept suggesting that any further demands could kill off a “voluntary” deal and trigger a default. Charles Dallara, MD of the IIF, was quited as saying that he remained “hopeful and quite confident” that the two sides could reach a deal that would prevent a full-scale Greek default when a ㈎.4bn bond comes due on March 20. Eurozone finance ministers meeting today will discuss which terms they are willing to accept as part of the second EUR 130 billion bailout package for Greece. Markets know that resolving the PSI+ discussions is a precondition for the second bailout package to proceed. That Portuguese yields reached new record highs on Friday and with spread widening vs. Germany is evidence that the confidence that most markets are expressing towards a ‘non-contagious’ resolution to the Greek PSI talks is far from universal. As expected, the EUR rally has stalled during Asian trading today but AUDUSD and NZDUSD have traded higher from Friday’s levels despite the eurozne concerns. Increasingly, EUR is diverging from the higher-growth currencies. We continue to look for lower levels on the EUR crosses, especially, EURJPY, EURGBP and EURAUD.
Fiscal Compact to feature on top of Monday’s Eurogroup agenda – will the ECB be satisfied?
The main item on Monday’s euro group agendas will be the Fiscal ‘Compact’. Media ‘leaks’ suggest that the latest draft to be discussed by eurozone finance ministers includes a centralised “correction mechanism” to be triggered “automatically” in cases of “significant” deviations from a target structural deficit of 0.5% of GDP. The European Commission will have to set deadlines for budgetary convergence, giving the European Court of Justice the power to fine countries whose balancedbudget laws are not abided with. While some of the public concerns expressed by the ECB about the wording of many clauses have reportedly been addressed, a key for the ECB’s blessing may be whether wording to the effect that countries can avoid penalties if they face “exceptional circumstances” stays in; if it does the ECB is unlikely to be happy. This alongside the risk that holdouts to any PSI agreement mean that an eventual deal will be coercive, are reasons in our mind to remains wary of the EUR rally in particular, and with that last week’s risk rally in general .
IMM data pre-dates EURUSD rally
Friday’s IMM /CFTC data showing that the speculative net EURUSD short extended to yet another record are not as revealing as some might think. They cover the period through Tuesday, and remember last week’s euro rally only really began on Wednesday. This Friday’s data may well show a paring of the net short. Nevertheless, there is undoubtedly still a big net short in place and so plenty of scope for the euro rally to extend. The close relationship between EURUSD and Xcurrency basis swaps for much of 2011 (see Chart) also suggests that a bigger rally is warranted given how far the basis swap has come in. We remain of the view that a push to the 1.3250 area can still be considered no more than a bear market rally. Monday’s initial focus in what is going to be on the 1.3000 level in what will be very holiday thinned, Lunar New Year, Asia markets. This though may make the extension of last week’s move up in EURUSD and commodity currencies and down in USD/Asia, that much easier to achieve if the news from Athens is genuinely good.
BNP Paribas