EUR holds onto yesterday’s gains despite setback on a PSI+ deal
Yesterday’s meeting of finance ministers failed to bring a resolution to the PSI discussions as Eurozone officials late on Monday formally rejected the Greek PSI offer on the basis of the coupon being offered. The key point of contention continues to be the coupon on new 30-year bonds Greece will offer in exchange for current holdings (and therefore the NPV value of the loss bond holders will suffer). This in turn appears to stem from concerns among them that the target of a debt/GDP ratio of 120% by 2020 is not ambitious enough to imply debt sustainability (suggestions are that something near 100% is needed, if not as early as 2020). This debate on debt sustainability has increased contagion concerns somewhat, to Portugal in particular (where the IMF projects its debt/GDP ratio peaking at 115% in 2013/2014), though spreads and
absolute yields were slightly back from last week’s highs on Monday. And Ireland’s debt characteristics aren’t very dissimilar to Portugal’s. Furthermore in taking back some of yesterday’s positive EUR newsflow, a spokesperson for Merkel has denied yesterday’s FT report suggesting Germany was now open to boosting the euro zone’s rescue funds to EUR750bn by allowing the EFSF (EUR250bn) to run parallel with the ESM (EUR500bn) in exchange for stricter budget rules.
Despite the setbacks in the PSI talks, EUR is holding onto yesterday’s gains. With concerns over no clear deal on the PSI+ talks, we are wary of the EUR recent strength and overall risk rally as the market may be complacent about the risks at hand. With the latest move higher in EUR likely to have been driven in part by short covering of investors’ extreme bearish positioning in EUR, there is scope for short-EUR positions to be reinstated today. At the very least, we expect investors to sell into further rallies and continue to look for lower levels on the EUR crosses, especially, EURJPY, EURGBP and EURAUD.
Eurozone PMIs expected to improve slightly, providing support to EUR
While we await further newsflow from today’s Eurogroup meeting on further progress on the PSI+ talks, the markets are likely to shift their focus on the Eurozone ‘Flash PMIs. The PMI data should continue to improve albeit from levels consistent with weak activity. The divergence within the Eurozone will remain quite stark with Germany’s output index indicative of a return to expansion and a contraction in the peripherals. The forward looking indicators will be important in assessing the overall momentum in the different sectors. Any improvement in the euro directly linked to better PMIs is likely to prove temporary in the absence of good news out of Brussels.
BOJ announcement a non-event, but Fed meeting is key for USDJPY
As expected the BoJ meeting was a non-event for markets. With USDJPY comfortably trading above 76.00 and EURJPY above 100.00, the MOF is unlikely to pressure the BoJ to proceed with another round of FX intervention, although positioning surveys showing that investors are holding extreme net long JPY positions does fulfil one of the MOFs preconditions for intervention. Going forward, the risk for USDJPY may be back under pressure if Treasury yields are pushed lower on the back of the FOMC as the Fed reveals its new forecasts.
BNP Paribas