Fitch to regard debt rollover as default

The euro continued its recovery from a three week low reached last week against the US dollar. Initially, the single currency looked like it would extend its drop, beyond the low of 1.4074 reached on Thursday, following the release of eurozone inflation data, as it opened lower at the start of the week and looked to erase the gains made last Friday.

Risk sentiment fell at the start of the week, weighing on riskier assets and favouring ‘safe haven’ currencies such as the greenback and the Swiss franc. After a weekend meeting between eurozone finance ministers in which unsurprisingly, no concrete agreement was reached in regards to solving the Greek debt crisis, the dollar was in high demand throughout the Asian session on Monday and most of the European session.

Global markets were in highly risk averse mode especially after a statement issued in conclusion to the meeting, which suggested that the payment of the next tranche will not be made before mid-July which shed further doubt, and a deal on financial aid for Greece was seen pushed further.

The single currency did however receive some reprieve on Monday afternoon after Klaus Regling, head of the European Financial Stability Facility, said that the bailout fund’s guarantees will be raised to €780 billion from the current €440 billion, triggering short-covering.

The EUR/USD recovered to close above 1.4300 on Monday and traded as high as 1.4388 on Tuesday morning, as stop-loss orders were triggered around 1.4350, testing its 20-day simple moving average (SMA) at 1.4378.

EU Economic and Monetary Affairs Commissioner Olli Rehn also said that he is confident officials will reach an agreement at an EU summit this week, on the expansion of the fund and on the design of the ESM (European Stability Mechanism) which is to replace the current EFSF in July 2013.

Predominantly, the focus remained on developments in Greece for most of Tuesday, but traders seemed to be giving the government of Prime Minister Georges Papandreou the benefit of the doubt, expecting the parliamentary motion to pass and the present administration to remain in office. The results of the vote was scheduled for midnight of last Tuesday, and if passed it is expected to give the euro a boost, but forex analysts see this boost as short lived, as Greece must also vote on new austerity measures later this month.

Meanwhile, the “troika” (EU, IMF and the ECB) seeks a compromise that will allow Greece to borrow new funds and rollover its maturing debt payments. Early on Tuesday, Fitch Rating Agency said it would regard both a debt exchange and a rollover of maturities by Greece, even a voluntary one, as a default.

The impact of Fitch’s remarks on the euro was however softened after Fitch said it would review the sovereign rating of the United States unless Congress agrees to raise the debt ceiling by August 2.

The single currency was up almost half a per cent over the week versus the dollar, by the time of writing. Further to the uncertainty surrounding the Greek vote, Forex investors were also wary about holding euro short positions ahead of the Federal Reserve’s FOMC interest rate decision, which was due on Wednesday. Analysts are anticipating the Fed to announce the end of QE2 in June. While a signal for a third round of quantitative easing is seen as highly unlikely. Nevertheless, traders are conscious of the risks posed if the Fed continues to take a weaker tone and avoid speaking about an exit from its ultra loose monetary policy.

The EUR/USD is expected to meet stiff resistance by the 55-day SMA at 1.4413 and by recent highs at 1.4452 and 1.4498. The weekly RTFX TraderTip scenario for the EUR/USD suggested the rally to proceed above 1.4511 after an initial fall, provided it does not fall below 1.3869.

Sterling was down on the week versus the euro and the Swiss franc, but up slightly against the dollar. The cable recovered to 1.6254 by Tuesday, after initially falling to 1.6109.

However it pared its gains versus the buck and extended losses against the single currency and the Swissie after a key policymaker from the Bank of England took a more dovish tone, warning of chances for more quantitative easing in the UK.

Bank of England Monetary Policy Committee member Paul Fisher spoke of the chances of further stimulus after public finances data presented a rather dim picture of the UK’s fiscal situation. He also added that the economic recovery remained fragile and more policy loosening could be needed should deflation risks appear.

The EUR/GBP is currently supported by the 55-day and 20-day SMAs at 0.8811 and 0.8802 respectively.

RTFX TraderTip’s weekly scenario for the pair suggests it should test 0.8931 after that a sell-off to 0.8758 or 0.8674 is expected. GBP/USD could run into significant resistance in the 1.6350 area, while risks to the downside are represented by the 1.6058 – 1.6026 area.

Upcoming FX key events:
Today: EZ Flash PMI & US New Home Sales.
Tomorrow: US GDP, US Deflator, US PCE & EZ IFO.

FX technical key points:
EUR/USD is neutral.
EUR/GBP is neutral.
USD/JPY is neutral.
GBP/USD is neutral.
USD/CHF is bearish, target 0.8200, key reversal point 0.9300.
AUD/USD is neutral.
NZD/USD is neutral.

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Mr Xuereb is a trader at RTFX Ltd.