Market Unfazed by Greece Credit Downgrade

Standard & Poor’s downgraded Greece’s credit rating to selective default, but currency markets were seemingly unmoved by the development. The U.S. dollar remained weak on the news, and …

Standard & Poor’s downgraded Greece’s credit rating to selective default, but currency markets were seemingly unmoved by the development. The U.S. dollar remained weak on the news, and notably weaker than the yen, which has the Japanese finance minister prepared to act in the event of speculative yen movement. The real news is in Europe, however, as stronger Eurozone countries attempt to shore up Greece and other weaker member states. One promising currency highlight was found in the Swedish krona, remaining one of the strongest performers in the G10. For more on this continue reading the following article from TheStreet.

The U.S. dollar is broadly weaker ahead of Wednesday’s three-year European Central Bank tender (Long Term Refinancing Operation).

The euro has largely shrugged off news that S&P cut Greece’s rating to selective default. Markets instead are focusing on the decline in oil prices and the potential for a large uptake at Wednesday’s LTRO.

The dollar is a tad weaker against the yen (down 0.1%), down for a second consecutive day. The move has prompted concern from Japan’s finance minister Azumi, saying that he will take action against speculative yen moves. EUR/JPY is trading just ahead of the 200-day moving average (107.05).

Meanwhile, Japanese retail sales surged in January, driven by rising car sales due in large part to the eco-car subsidy. Car sales were up 24% year over year, with retail sales climbing 1.9% (vs. -0.1% expected).

The Australian dollar is flat after reaching a one-week high of 1.078. Global stocks are mostly higher, with EuroStoxx 600 up 0.1%, though bank shares are flat. The MSCI Asia Pacific Index is currently up 0.8%.

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There have been several developments today that, while not having much impact on prices, are still noteworthy. The German Constitutional Court has ruled that the budget committee set up to expedite parliamentary approval is limited in scope to decide only secondary market bond purchases by the European Financial Stability Facility.

The committee is not a sufficient mechanism for other European Monetary Union aid issues. The decision can only be seen as the third blow to German Chancellor Angela Merkel in the past several days. She was forced by her own coalition partner to select Joachim Gauck as the coalition’s candidate for president. Merkel failed to carry the majority of her coalition in Monday’s vote on Greek 2.0. And now this constitutional setback that can only slow the process further.

Another procedural development has been the European Central Bank’s decision not to accept Greek government bonds as collateral for the LTRO Wednesday. This adds a new wrinkle into estimates for the takedown of the LTRO.

There have been several substantive developments as well. First, it appears that German inflation is stickier than anticipated as the preliminary state reports suggest a 2.3% pace rather than an expected 2.1%. Second, Italy’s run of well-received bond auctions continues. Today it raised about 6.25 billion euros in five and 10-year paper, the latter being a new benchmark. The auctions for these tenors resulted in the lowest yields since May and August 2011 respectively. There was follow through in the secondary market.

Third, in contrast, Spanish bonds are under pressure following the Spanish finance minister admission that the deficit blow out last year was more than initially claimed. Last year’s deficit was 8.5% of GDP, up from initial estimates of 8.2% and the 6% target.

Fourth, French Socialist presidential candidate Francois Hollande has been pressing his case harder, calling for a 75% income tax on top earners and insisting on renegotiating the fiscal compact. Sarkozy has been unable to capitalize as appears to backtrack from promise to put the issue before a public referendum.

The Swedish krona is among one of the best performing currencies in the G10 this morning driven in part by strong domestic data and favorable risk appetite. In the near-term we see support for EUR/SEK at 8.82, with resistance at 8.820.

Hungary’s central bank holds its policy meeting at 8 a.m. New York time, with rates expected to be kept steady at 7.0%. In the near term, we think that EUR/HUF will be based around 286 this month, which coincides with the 62% retracement level of the July-to-January rise, and we see levels near 290 as a good area to establish new medium-term HUF shorts.

This article was republished with permission from TheStreet.


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