Germany willing to reach accord on 2nd Greek bailout

At the beginning of the week forex trading was fairly subdued with the UK and the US both on market holidays. Nonetheless Greece remained on centre stage as European leaders struggled to come up with a viable solution for the country’s ailing debt situation.

Last Friday Greek Prime Minister George Papandreou and the other opposition parties failed to reach an agreement on additional fiscal reforms – reforms made a necessary condition for European financial support. Over the weekend the Financial Times reported that Europe was trying to craft a new deal for Greece, a second bail-out package, now that it became evident that Greece would not be able to refinance part of its debt in 2012.

The report went on to mention that this time around more foreign involvement in Greek economy was being foreseen; in the form of tax collection and privatisation of state assets. It was also mentioned that the new deal would include incentives for individual debt holders to voluntarily extend the maturity of Greek debt.

While the EUR/USD remained quite flat throughout Monday’s session, given both the UK and the US were on holiday – the pair got a lift early in Tuesday’s session. Throughout the Monday session the pair only closed 34 pips higher when compared to open, yet the currency pair added around 140 pips only throughout Tuesday morning. The euro rallied on news reports that Germany showed a willingness to reach an accord on a second aid package for Greece – the news was published on the Wall Street Journal. Germany said it could try to ease negotiations by dropping demands for an early rescheduling of Greek bonds (i.e. asking private creditors to extend the maturities of their Greek debt).

For the earlier part of the week the British pound was rather neutral in aggregate, when seen against the majors. The GBP/USD traded in the range of 1.6450 - 1.6546; and the EUR/GBP traded in the range of 0.8655 - 0.8744, up to the time of writing. The GBP/USD was mainly trading sideways during Monday’s session, and although the pair was bullish during the early Tuesday session, the GBP pared its gains during the European session.

The EUR/GBP was also trading sideways during the Monday session but the pair turned bullish during the Tuesday session – as the pound struggled against the euro’s lift off.

Although the GBP remains correlated to risk appetite in general, the cable recently showed it had shrugged off the sluggish economic data coming out of the UK, as the prospects of an eventual BoE rate hike left its mark on the currency. Despite the milder economic data inflationary pressures kept boggling the BoE’s monetary policy committee, as the recent UK CPI data showed that for the month of April actual figures rose to one per cent and to 4.5 per cent on a year-to-year basis.

Earlier this week Moody’s placed Japan on review for possible downgrade on fears that in the future Japanese government debt could be pressured by a risk premium, although it was acknowledged that such risk was not foreseen in the near to medium term. The news toppled support for the Japanese Yen and the USD/JPY rallied from 80.80 levels towards 81.77 daily highs, up to the time of writing. A weaker Yen may help to revive Japanese exports if it has a long lasting effect. The USD/JPY currency pair was up 1.12 per cent, in the former part of the week, up to the time of writing.

However this news failed to dent risk sentiment, as markets focus was captured by better manufacturing numbers reported by Japan in the former part of this week. Japan reported much better manufacturing PMI and industrial output.

New Zealand reported stronger data early this week. Trade balance was reported at NZ$1,113 million nearly double the previous and expected readings. While Business confidence rose to 38.3 from a previous 14.2. The data lifted support for the kiwi. The NZD/USD was up 1.26 per cent, in the former part of the week, up to the time of writing.

The Bank of Canada left its policy rate unchanged in an announcement made last Tuesday. On the day the Canadian dollar gained around three per cent against the majors ahead of the release as forex investors placed their positions ahead of the interest rate decision.

The Bank of Canada was not in fact expected to make any changes to its policy rates but the currency enjoyed support, as investors speculated on hawkish comments that could favour support for the Canadian dollar. In comments accompanying the release the Bank of Canada did in fact say it would eventually have to withdraw the monetary stimulus.

Upcoming FX key events:
Today: UK PMI Construction; US Factory Orders.
Tomorrow: German PMI Services; EZ PMI Composite and PMI Services; US Non Farm Payrolls and Unemployment Rate.

FX technical key points:
EUR/USD is neutral.
EUR/GBP is bearish, target 0.8580, key reversal point 0.90500.
USD/JPY is neutral.
GBP/USD is neutral.
USD/CHF is bearish, target 0.8400, key reversal point 0.9300.
AUD/USD is neutral.
NZD/USD is neutral.

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Mr Muscat is senior trader at RTFX Ltd.