Greek PSI Shows Promise: Currency Implications

The success of the Greek Private Sector Initiative (PSI) and larger bailout hinges upon private bondholders to accept a significant write-down on investment assets, and news is coming …

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The success of the Greek Private Sector Initiative (PSI) and larger bailout hinges upon private bondholders to accept a significant write-down on investment assets, and news is coming that more holders are agreeing to the terms. The effect has been the U.S. dollar’s flat-to-lower performance against major emerging market currencies. Spanish industrial contraction and rising 10-years yields suggests it may be next among the struggling PIIGS to face an intra-country debt crisis. Meanwhile, the euro rose slightly higher against the U.S. dollar, and both the Australian and New Zealand dollars made gains on the news. For more on this continue reading the following article from TheStreet.

The U.S. dollar is flat-to-lower against most major and emerging market currencies. Tuesday’s pessimism over the Greek PSI participation has given way to a nervous holding pattern after more debt holders say they will accept the offer.

The euro is slightly higher against the dollar after having retraced more than 61.8% of the rally since Feb. 16. German January factory orders at -2.7% month over month came in far below the expected 0.6% month over month gain, with export orders contracting -5.5% month over month. The data helped bring EUR/USD off its intraday highs.

AUD made some modest gains, moving back to test the 50-day moving average at 1.0562 despite a weaker fourth-quarter GDP release of 2.3% year over year (below an expected 2.4%) and 0.4% quarter over quarter (compared to 0.8% expected) fanning expectations of further easing by the Reserve Bank of Australia.

NZD is outperforming amongst majors ahead of today’s RBNZ meeting after failing to break below the 200-day moving average Tuesday. Oil prices are up about 0.5% after Tuesday’s sharp declines.

The MSCI Asia-Pacific Index fell 0.9% catching up with declines of U.S. stocks Tuesday, while the Nikkei fell 0.6%. European bourses are 0.25% to 0.9% higher with the notable exception of the Spanish IBEX index, falling 0.7% driven by sharp declines in the utilities sector.

Spanish 10-years yields continue to rise above those of Italy, and suggest that Spain may be the next country in the hot seat. Data released today confirms that the contraction in Spanish industrial production is still ongoing, with January IP falling -4.2% year over year compared with a decline of -3.5% in December. The spread between the two country’s bonds are now at 13 basis points, a level not seen since August 2011, and up from a low of -202 basis points at the start of the year.

News out of Greece is quiet ahead of the PSI announcement Thursday, but markets appear to be pricing out the worst-case scenario in favor of a likely muddle-through solution. Even with Greek PSI out of the way, we fear that the news stream from Spain, Portugal and others will continue to underscore the negative debt and growth dynamics.

In the U.S., the Automatic Data Processing report on private sector jobs this morning may offer some clues about Friday’s jobs report, but we suspect both will be overshadowed by eurozone concerns. Consensus for ADP is for an added 215,000 jobs vs. 170,000 in January, and would be consistent with continued improvement in the U.S. labor market.

Indeed, the fundamental theme of an improved U.S. outlook coupled with eurozone recession could help the dollar to continue firming even after this current bout of eurozone turmoil ends.

Reserve Bank of New Zealand meets today and is expected to leave rates steady at 2.5%. Like Reserve Bank of Australia earlier this week, we expect RBNZ to maintain a dovish bias and to warn of downside global risks.

AUD and NZD were hit particularly hard Tuesday. For NZD, the next level of support is at the 200-day MA around .8090, which coincides with minimal retracement target of .8086 from the December-February rise.

AUD has outperformed NZD recently, with AUD/NZD cross moving up to break 1.30 on Tuesday. However, that AUD outperformance may be over for now. Weak Q4 GDP growth print for Australia of 0.4% quarter over quarter (vs. 0.8% expected) represents a sharp slowdown in Q3, and will likely fan expectations of another RBA rate cut when it next meets April 3.

With regards to AUD vs. USD, the 200-day moving average around 1.04 is a good near-term target, while retracement targets are 1.0476, 1.0359, and 1.0241 from the December-to-February rise in AUD.

While this point is moot now, RBA Deputy Governor Lowe said the bar for FX intervention is "quite high" and suggests low risk of action against AUD strength ahead. We do expect AUD to strengthen further along with most emerging market currencies once this risk-off trading ends.

This article was republished with permission from TheStreet.

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