Greek Bailout Moves Dollar

Doubt regarding the potential success of the latest Greek bailout is boosting the U.S. dollar while other major currencies soften, even including the stalwart Australian dollar. The euro, …

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Doubt regarding the potential success of the latest Greek bailout is boosting the U.S. dollar while other major currencies soften, even including the stalwart Australian dollar. The euro, which rallied early on, could not hold onto the gains and is now projected to further weaken. The Greek bailout is relying on austerity measures and debt restructuring for its success, but many believe it will only be one or two years before Greece needs yet another bailout, which is eroding confidence in related currency. For more on this continue reading the following article from TheStreet.

The U.S. dollar is advancing against the majors and most emerging markets as the "sell the fact" theme prevailed following the approval of the Greek bailout. The euro initially rallied to 1.329 in the Asian session but has gradually declined after two failed attempts to break 1.330. Near-term support is seen at 1.315 with 1.330 remaining a key level of resistance.

Most of the G10 pairs are weaker against the U.S. dollar, with the Australian dollar leading losses down nearly 1%. Sterling is currently down 0.3% to 1.580 after stalling ahead of 1.587. The yen is trading flat against the dollar after edging up to 79.85 highs, with 80.00 a potential source of price congestion due to pre-fiscal year-end hedging. Global equity markets are mixed, with the MSCI Asia Pacific trading flat. The EuroStoxx 600 is down 0.6% led by the 1.2% loss in banks.

A Greek deal has emerged from the marathon meeting of European finance ministers, but it is far from clear that it ends even this chapter of the saga. Attention will turn to the participation in the PSI.

The agreement struck appears to be more onerous than initially anticipated. Part of the deal also includes reduction in the interest rate on the previous international assistance and there is no reason why those lower rates should not apply to Ireland (which is seeking relief on promissory notes used to recapitalize its banks) and Portugal.

Perhaps most importantly, the package does not give confidence that this solves Greece’s problems, even if PSI is acceptable and Greece actually does implement the agreements.

The Greek deal stands on two legs — austerity and debt restructuring. The clear and present risk is that these measures prolong the economic downturn and that another aid program is needed in one to two years. In addition, the economic demands on Greece have undermined its political stability.

In effect, Germany’s controversial proposal for a European Union commissioner and making debt servicing the top priority bore fruit in the form of a European Commission task force being embedded in Greece as an "enhanced and permanent presence on the ground" to improve the workings of Greece’s bureaucracy. An escrow-like account is also being established that prioritizes Greece’s solvency (ability to service its debt) over the other demands on the government’s budget.

Of the 130 billion euro aid package, the vast majority (roughly 85%) is being used to bail out lenders not bail out Greece. Specifically, 30 billion euros is for the cash component of the PSI, 35 billion euros is to fund the government’s purchase of bonds held as collateral by the European Central Bank. Another 40 billion is to recapitalize Greek banks, on top of the 10 billion euros earmarked from Greek 1.0 that has not been used.

European Union officials have admitted they underestimated the challenge presented by the weak administrative capacity and weak political unity in Greece. Not only do they appear to be risking repeating this mistake, but also of bleeding the patient they hope to save by pursuing the pound of flesh in the name of the creditors.

Australia Minutes

The Reserve Bank of Australia’s monetary policy minutes for February point toward another likely pause in March. Overall, the minutes were largely in line with the initial policy statement by reiterating that the RBA is ready to ease further if needed, suggesting the threshold for a rate cut is higher than many anticipated.

The rally in emerging markets foreign exchange has lost some steam in February even though equities continue their strong performance. In January, the top 10 performers saw gains ranging between 4.5% and 8.2% against the dollar, while the S&P 500 rose 4.4% and the MSCI emerging markets was up 11.2% (which includes currency appreciation).

In contrast, the month-to-date performance of the top 10 emerging markets currencies ranges from 1.6% to 3.8%, while the S&P 500 is up 3.7% and the MSCI EM is up 4.6%. We interpret this as a first sign that the stellar performance of the high-beta EM currencies may be behind us.

This article was republished with permission from TheStreet.

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