After weeks of speculation and a marathon of talks, eurozone finance ministers finally struck a deal and awarded Greece a financial bailout worth €130 billion. Talks which started on Monday afternoon extended well into Tuesday morning before a deal was finally announced. The agreement, which is meant to ensure that Greece averts a chaotic default in March, was made possible after private bondholders were persuaded to take larger losses and Athens committed to more cuts.
Among the key terms agreed at the eurogroup meeting between finance ministers were a larger nominal loss on holdings by private investors and a lower coupon on the new bonds. The IIF (International Institute of Finance) which is representing private bondholders appeared slightly hesitant about the deal as the terms on Public Sector Involvement are slightly harsher than previously agreed. The IIF called upon members to consider it “carefully” as they will now be asked to take up 53.5 per cent losses on their nominal value from their original agreement of 50 per cent. The PSI deal was instrumental in clinching the deal and eurogroup chairman Jean-Claude Juncker had stressed that a “successful PSI” was a “precondition” for the aid programme.
The European Central Bank will also be contributing to helping Greece reduce its debt. In a statement, the eurogroup said the ECB will pass up profits it made from buying Greek bonds over the past two years to national central banks for their governments to pass on to Athens. The ECB has reportedly spent around €38 billion on Greek debt which is now said to be worth €50 billion.
With the latest measures taken, calculations suggest that Greek debt will fall to 120.5 per cent of GDP in 2020, largely in line with the IMF’s definition of “sustainability”. International Monetary Fund managing director Christine Lagarde announced that the board will decide on the new aid package and the IMF’s contribution in the second week of March.
The euro surged higher initially on Tuesday in reaction to the news on Greece but did not hold on to its gains later in the session. Risk appetite slipped as markets remained hesitant despite the agreement. Investors remained cautious on concern that further political action may be needed to resolve the region’s debt crisis. Concerns are tied to the fact that the new terms on the PSI are less favourable for bondholders, and an analysis by the IMF and European experts suggested that Greece remained “accident-prone” and its debt could still blow up to 160 per cent of its GDP in a worst-case scenario.
EUR/USD was up to 1.3293 shortly after the announcement of the Greek deal, up almost 0.40 per cent and EUR/JPY inched to a three-month high. The single currency was mostly lifted by relief that the risk of default of their bond repayment commitments on March 20 was averted, but the deal failed to spark risk sentiment. In fact higher-yielding currencies did not track the common currency higher. The antipodeans were under pressure with the Aussie slipping more than 0.70 per cent against the dollar, 0.65 per cent versus the yen and more than half a per cent against the euro on Tuesday. The kiwi was also under pressure falling more than half a per cent against the dollar and the yen.
Technically, EUR/USD reversed on Thursday of last week, bouncing off its 50-day moving average and closed back above its 20-day moving average on Friday. The pair has now stalled just shy of its 100-day moving average, now at 1.3315. It is expected to gain bullish momentum in case of a break higher than this level. To the downside, support is seen by the 20-day moving average, now at 1.3169, ahead of last week’s low of 1.2975. A close below last week’s low should pave the way for further declines towards this year’s low at 1.2624.
In the meantime, USD/JPY continued its rise higher at the start of the week. The pair started its rally after hitting a year’s low at 76.03 on February 1 and was pushed higher with last week’s announcement by the Bank of Japan to expand its asset purchases programme by 10 billion yen. The BOJ also put a target on inflation, setting it at one per cent, signalling a clear policy goal and reaffirming its resolve to fight deflation and combat speculative moves against the Japanese currency.
After soaring above its 200-day moving average last week, the pair has now paved the way for further gains to the upside. By the time of writing, the pair hit a fresh six-month high at 79.88 on Monday of this week. A break higher than 80.24, its August 4 high, is needed to establish a bullish structure and clear the way for a rise towards targets at 85 levels.
Upcoming FX key events:
Today: German IFO Business Climate Index and Expectations.
Tomorrow: German GDP, UK GDP & US Michigan Consumer Sentiment.
Technical key points:
EUR/USD is bearish, target 1.2500, key reversal point 1.3350.
EUR/GBP is bearish, target 0.80, key reversal point 0.8550.
USD/JPY is neutral.
GBP/USD is neutral.
USD/CHF is bullish, target 1.0050, key reversal point 0.8550.
AUD/USD is bullish, target 1.1090, key reversal point 1.0450.
NZD/USD is bullish, target 0.8570, key reversal point 0.8000.
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Mr Xuereb is a trader at RTFX Ltd.