DailyFX Morning Slices: Euro Fails to Maintain Gains After Greek Deal; AUD, NZD Lead

Forex: Euro Fails to Maintain Gains After Greek Deal; AUD, NZD Lead

The Australian, Canadian, and New Zealand Dollars are the top performers of today’s session thus far as global risk appetite has been momentarily boosted by a positive outcome to the Greek debt negotiations. After failing to reach a compromise last week, Euro-zone finance ministers were able to agree upon reducing Greece’s debt burden by more than €40 billion, which would cut the country’s debt-to-GDP ratio to 124% by 2020; it is slated to hit 190% in 2014.

While the EUR/USD traded back towards its early-November high of 1.3010 (ultimately topping at 1.3008 on the session), demand for European currencies has been somewhat muted this morning, as the Euro has shed its post-Greek deal gains rather quickly. Curiously, Italian and especially Spanish bond yields have improved while equity markets have fallen back – this is not a typical shakeout.

Our belief is that equity markets are always “late to the party,” meaning that their move is regarded as the least significant when cross-market analysis is considered: with FX markets stable if not suggesting increased demand for high beta currencies; and peripheral bond markets improving (lower yields), it appears that the broad market has ‘bought’ the Greek debt deal (specific figures below).

Elsewhere, it is worth noting that US Congressional leaders finally return to Washington, D.C. today to resume fiscal cliff/slope negotiations after what has essentially been an eleven day holiday. Volatility in precious metals and the USD/JPY could increase during the upcoming US sessions as a result.

Taking a look at European credit, peripheral bond yields are barely lower, decoupling from slight weakness in the Euro and European equity markets. The Italian 2-year note yield has decreased to 1.941% (-1.3-bps) while the Spanish 2-year note yield has decreased to 2.858% (-7.9-bps). Likewise, the Italian 10-year note yield has decreased to 4.734% (-0.8-bps) while the Spanish 10-year note yield has decreased to 5.525% (-5.9-bps); lower yields imply higher prices.


Christopher Vecchio, Currency Analyst

DailyFX Morning Slices: Japanese Yen Rebounds as European Leaders Scramble for Greek Deal

Forex: Japanese Yen Rebounds as European Leaders Scramble for Greek Deal

High beta currencies and risk-correlated assets are only slightly weaker to start the last week of November, as a key Euro-zone finance ministers’ meeting is underway that will help determine the fate of Greece’s increasingly cumbersome debt burden. The schism that Greece faces between itself and the rest of Europe is substantial, with its debt-to-GDP ratio forecasted to hit 190% in 2014, while pan-European leaders aim to bring down the ratio to 120% over the next ten years or so (very open ended given the progress of reforms).

So far, what we know is that Greece remains due to receive €31 billion that was supposed to be released in May. But before these funds are released, finding an agreeable solution as to how to best fix Greece’s debt issues is the main concern; Euro-zone finance ministers and the International Monetary Fund have been negotiating for the past week on this very issue. The ramifications of a plan falling short of expectations could prove to be the final straw for Greece. Questions linger as to how much more the country can take in terms of exogenous political influence, a depressed economy, and widespread social unrest, before Greece moves to exit the Euro-zone. Certainly, with Alexis Tsipras’ anti-bailout Syriza party leading in recent polls by 26.0% to 21.5% over current Prime Minister Antonis Samaras’ pro-bailout New Democracy party.

While the Euro is mostly lower on the day, these concerns seem to have been nearly written off, or at least a favorable market outcome is being priced into the FX market. Meanwhile, a regional election in Spain over the weekend with a result implying diminished credibility for struggling Prime Minister Mariano Rajoy has underpinned weakness in European bond and equity markets, leading to a rebound in the safe haven currencies, the Japanese Yen and the US Dollar.

Taking a look at European credit, peripheral bond yields are mostly higher, keeping the Euro tempered on the day. The Italian 2-year note yield has increased to 2.012% (+5.0-bps) while the Spanish 2-year note yield has increased to 2.953% (+7.5-bps). Similarly, the Italian 10-year note yield has increased to 4.766% (+2.7-bps) while the Spanish 10-year note yield has increased to 5.621% (+4.4-bps); higher yields imply lower prices.


Christopher Vecchio, Currency Analyst

FX MATH: Japan’s Safe-Haven Status Won’t Defy Logic Forever

By Stephen L. Bernard and Vincent Cignarella

A bevy of reasons to sell the yen could finally be catching up with the Japanese currency.

Japan has gargantuan government debt, a sputtering economy, an unstable government and a narrowing account surplus. On their own, all of these are good reasons to sell a currency, but combine them into one country and it’s astounding the yen has remained robust.

The gains are largely thanks to the euro, a region with all of the same problems as Japan with the added ugliness of an ongoing banking crisis and the lack of a fiscal union. Late last month, the yen traded at its highest point against the euro since November 2000.

But amidst all the reasons to sell euro, last week’s announcement from European Central Bank President Mario Draghi could serve as a turning point. Mr. Draghi said “the ECB is ready to do whatever it takes to preserve the euro” and “it will be enough.” In the immediate aftermath, the euro has come back slightly in recent days from that nearly 12-year low.

Mr. Draghi alone won’t be enough to kill the euro-yen trade, but Japan’s economy could do it instead.

Data earlier this week showed Japan’s current account surplus sharply narrowed in the first six months of the year as its merchandise trade gap hit its highest level on record.

At the same time, Japan’s gross government debt as a percentage of gross domestic product is estimated at 236% for 2012, according to the International Monetary Fund. That’s nearly double Italy’s debt-to-GDP ratio at 124% and nearly triple Spain’s debt-to-GDP level of 79%.

And don’t forget the increasing possibility of intervention by the Japanese government as the yen stays red hot. While the Bank of Japan didn’t expand its asset purchase program at its meeting this week–which helped the yen strengthen even further–the likelihood of outright intervention to weaken the yen has grown. In that instance, the yen would theoretically weaken across the board.

In an intervention, purchasing euro-zone debt would quickly make more sense than buying Japanese low-yielding debt, further adding to the currency reversal.

Many a pundit has said recently euro selling was partly a result of the so called “carry trade.” The selling of a low-yielding currency in favor of one with a higher-interest yield in order to earn the differential as a return on investment. But in this case, that argument doesn’t hold water with 10-year Spanish debt yielding 6.82%, according to Tradeweb. Italy’s 10-year bond is yielding 5.80%.

Japan’s debt with a similar maturity is yielding about 0.8%.

There’s only one way to explain how the yen could continue to defy all this logical evidence: the expectation that the euro will not survive in its present form. Barring that outcome, the yen’s safe-haven pedestal appears to be crumbling.

(Vincent Cignarella is a currency strategist/columnist for DJ FX Trader, with 30 years experience in currency markets including as a bank dealer at major money-center commercial banks. He can be reached at vincent.cignarella@dowjones.com. Stephen Bernard is a New York-based currency reporter for DJ FX Trader with more than seven years experience as a journalist, having previously worked for the Associated Press. He can be reached at stephen.bernard@dowjones.com)

Greece ‘Very Close’ To Cutting Debt/GDP To 120% By 2020 – Report

FRANKFURT (Dow Jones)–Greece will come “very close” to reducing its debt-to-GDP ratio to 120% by 2020 following new reform measures and a private creditor haircut, German newspaper Die Welt reports Saturday, citing people familiar with the situation.

The so-called Troika–comprising the International Monetary Fund, the European Union and the European Central Bank–has picked a 120% debt-to-GDP ratio as a sign of debt sustainability.

While the 120% level may not be hit exactly, Greece’s debt-to-GDP ratio is likely to be far below 129% by 2020, the newspaper reports.

Greece is therefore likely to have fulfilled many of the Troika’s conditions for new aid by the time the trio presents its debt sustainability report next week, the newspaper reports. Still, agreement has yet to be reached on around “two dozen things,” including a permanent oversight mechanism of reforms in Athens and creation of an escrow account.

The Troika’s report assumes Greece’s economy will shrink strongly until 2013 but afterwards grow continually, the newspaper reports. The ECB is expected to help reduce Greece’s debt by more than 3 percentage points by distributing the profits it makes on its Greek bond holdings to euro-zone governments, including Greece. Euro-zone states are also expected to contribute by reducing the interest rates they charge on bilateral loans to Greece.

A summit of euro-zone governments will take place in addition to the EU summit on March 1-2, the newspaper adds.

-By Tom Fairless, Dow Jones Newswires, +49 69 29725 505; tom.fairless@dowjones.com

Greek PM confident debt talks will be clinched in time

By George Georgiopoulos
ATHENS, Jan 16 (Reuters) – Greek Prime Minister Lucas Papademos promised a debt swap would be clinched in time and dispatched senior officials toWashington on Monday to break a deadlock in talks that has prompted new fears of a disorderly default.

Athens needs a deal with the private sector, the EU and the IMF to avoid going bankrupt when 14.5 billion euros of bond redemptions fall duein late March, but talks with its creditor banks broke down without an agreement on Friday. (news)
A leading representative for the creditors said Athens was not the problem in the talks, suggesting the issue lay with terms insisted onby foreign lenders keeping Greece afloat with aid.

The head of Greece’s debt agency and a senior adviser were travelling on Monday to Washington to meet International Monetary Fund officials, a government source said, and Athens put a braveface on the standoff.

“There is a little pause in these discussions. But I am confident that they will continue and we will reach an agreement that is mutually acceptable in time,” Papademos said according to a transcript of an interview withCNBC.

Under the bailout terms agreed in October, Greek privately held debt would be reduced by half so that, together with structural reforms, the overall debt to GDP ratio of Greece would fall to 120 percent in 2020 from 160 percent now. Inspectors from the EU, the IMF and the ECB, due in Athens on Tuesday for talks on a second, 130-billion-euro bailout, have warned they need the deal with the private sector to achieve that debt-reduction goal before they agree to give more aid.

Papademos said talks on these two processes must be completed over the next two to three weeks.

“This is the objective. I think the conditions are in place in order to do so,” Papademos told the broadcaster.

UNCERTAINTY GROWS Charles Dallara, head of the Institute of International Finance who represents Greece’s private creditors, told the Financial Times an agreement in principle was needed by the end of this week if it was to be finalised in time for the March bondredemptions and said the Greeks were not the problem.

“All the European heads of state said they wanted a deal with a 50 per cent (haircut) and a voluntary agreement,” Dallara was quoted as saying. “Some of their own collaborators are not following that decision.”

Negotiations stalled over the interest rate Greece will pay on new bonds it offers.

Greece, in its fifth year of recession, has continuously missed its fiscal targets, prompting speculation that the country mayneed further financial support to put its debt on viable footing.

The country has repeatedly flirted with bankruptcy in recent months, with only bailout loans from European partners and the IMF agreed on condition of unpopular austerity measureskeeping Greece away from a default.

Papademos played down speculation that Athens would need additional aid to that agreed at a euro zone summit in October.

“I think the funds that have been pledged at the Euro Summit, combined with theoutcome of the private sector involvement process should be sufficient in order to support financially the Greek economy,” Papademos said.

Uncertainty over fixing Greece’s debt crisis is more of a threat to Europe’s stability than the downgradeon Friday of nine euro zone countries’ credit ratings by Standard & Poor’s, British finance minister George Osborne said on Monday. (news)
The downgrades were largely expected and traders said pressure on Italian and Spanish bondyields on Monday were offset by the European Central bank stepping in to buy the bonds. (news)
Bill Gross, the manager of the world’s largest bond fund PIMCO, said in a Twitter post that Standard & Poor’s downgrade had made investors”aware” that countries can default and Greece would be the next example.

(Additional reporting by Angeliki Koutantou and Karolina Tagaris; Writing by Deepa Babington; Editing by Ingrid Melander/Mike Peacock) Messaging: deepa.babington.thomsonreuters.com@reuters.com)