China Cuts RRR
China cut the reserve ratio requirement by 50 bp in a surprise move over the weekend. Previous policy manoeuvres of this kind have generally boosted global risk appetite and we would expect a repeat performance as Asia opens on Monday, especially given the element of surprise. Meanwhile expectations continue to build ahead of Monday’s meeting of Eurozone finance ministers and the outcome of the meeting is likely to be a defining moment for how risk appetite evolves throughout the week. Germany’s Finance Minister Schaeuble suggested a decision would be made on the ‘whole program’ on Monday and he backed away from the idea of a piecemeal step-by-step approval process that could drag on for several weeks. That’s a promising development. However, Eurogroup Chair Juncker indicated that much negotiation is still needed if full agreement is to be reached by Monday night. The Financial Times reported that the Greek parliament is to vote this week on adding CAC clauses into existing Greek bond contracts. This is likely to be seen as a preparatory step towards an enforced compulsory restructuring should voluntary participation levels disappoint. It also raises the risk that Greece will be downgraded again given S&P has already announced that if legislation is passed to insert such clauses then “we would lower the issue ratings on debt issues concerned to ‘D’ from ‘CC’”. In addition, any subsequent invocation of these CAC clauses would very likely cause CDS contracts to be triggered, although the decision on this point will rest with ISDA. In a further sign of progress towards a second rescue package for Greece, a Greek official announced that the debt swap for private investors would be launched by March 8, with the aim of concluding the transaction three days later. USDJPY continued to march higher, trading in a range 78.80-79.62 on Friday, and closing at a 7-month high. EURUSD traded 1.3101-1.3198.
UBS Investment Bank