Risk aversion was the predominant sentiment at the start of the week, as the tone remained similar to that on Friday. In forex markets, the “safer” currencies like the dollar and the yen were the most sought after initially, while global equity markets were largely in the red. The dollar was also buoyed by comments from President of the Federal Reserve Bank of Dallas Richard Fisher, who said on Monday he opposed further quantitative easing.
A disorderly Greek default may leave Italy and Spain needing outside help to stop the contagion- Emman Xuereb
Weighing on risk appetite on Monday were concerns over global growth following a downward revision of Chinese growth, with the GDP target revised to 7.5 per cent, the lowest since 2004. A mixed services PMI print from the eurozone continued to fuel risk aversion, but better than expected retail sales numbers from Europe and soaring ISM non-manufacturing numbers from the US helped risk recover slightly at the US open on Monday.
However the recovery was short lived as growth concerns lingered, and fears emerged that Greece will not be able to complete a bond swap deal with private creditors. Greek private bondholders had until today to decide on whether they will contribute in a bond swap deal, which is part of the terms agreed to release the second bailout package worth €130 billion.
Reuters reported that in a document it had obtained, the Institute of International Finance (IIF), the group representing Athens’ bondholders, warned that a “disorderly Greek default may leave Italy and Spain needing outside help to stop the contagion” and could cost the eurozone more than €1 trillion of damage. Despite this, Greece expects bondholders to accept their offer and Finance Minister Evangelos Venizelos said that this was the best offer they would get.
Investors will wait eagerly for the results on PSI participation levels, which will probably be announced tomorrow, if today’s deadline to accept the swap is kept. An eventual lack of private sector participation could trigger the collective action clauses (CACs), and possibly end up in a CDS event.
The euro came under pressure on the growing fears over the Greek debt swap deal on Tuesday and higher-yielding currencies like the Australian and New Zealand dollars dipped across the board.
EUR/USD fell to a two-week low, at 1.3113, and was down 0.60 per cent by the time of writing. It closed below its 100-day moving average last Friday, now at 1.3292, and extended its decline to breach a rising trend line off the lows in January and February of this year. EUR/JPY had fallen on five consecutive days on Tuesday. It was down more than 1.20 per cent to 106.20. The pair had breached its 200-day moving average on Tuesday, at 107.00, which could give scope to further declines.
After falling sharply for most part of the year, the yen recovered some ground at the start of the week. USD/JPY eased from near nine-month highs on Monday, and extended its drop on Tuesday, where it was down almost 0.75 per cent to 80.78. The pair had rallied more than six per cent so far in 2012, up to a nine month peak of 81.87. Price action retreated as forex investors were seen taking profits after its sharp rally, in which the greenback had muscled over 7.50 per cent from its lows on February 1.
Overall, the uptrend remains largely unscathed, and a positive jobs report from the United States tomorrow could well give rise to another rally higher. The yen has come under increasing pressure against the dollar, ever since the Bank of Japan eased policy further and also set its inflation target at one per cent.
Overnight on Tuesday, the Reserve Bank of Australia kept its interest rates on hold at 4.25 per cent and left options very much alive for monetary easing, should the state of the economy deteriorate. In the accompanying statement, the RBA sounded less concerned over global growth and the risks from Europe and China, acknowledging that a “deep downturn” will now probably not occur. However, they kept language implying an easing bias; saying inflation outlook still suggests “scope for easier policy” if “demand conditions weaken materially”. The Australian dollar dropped to a five-week low after the RBA’s announcement against the greenback. AUD/USD fell more than one per cent to 1.0555 and is now well off its seven-month high of 1.0856, hit on February 29. AUD/JPY was also significantly under pressure, as it shed more than 1.60 per cent on Tuesday following the central bank’s decision. It fell to a low of 85.39 by the time of writing.
Upcoming FX key events:
Today: UK BoE Interest Rate Decision and Asset Purchases Target, & EZ ECB Interest Rate Decision and News Conference.
Tomorrow: German CPI, Canadian Net Change in Employment & US Non-Farm Payrolls.
Technical key points:
EUR/USD is bearish, target 1.2500, key reversal point 1.3750.
EUR/GBP is bearish, target 0.80, key reversal point 0.8550.
USD/JPY is bullish, target 85.00, key reversal point 7800.
GBP/USD is neutral.
USD/CHF is neutral.
AUD/USD is neutral.
NZD/USD is neutral.
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Mr Xuereb is a trader at RTFX Ltd.