 | 中 国 简 谱 网 | Currencies and equities ended the week on a strong note thanks to the better than expected U.S. labor market report. All of the major currencies traded higher against the U.S. dollar on Friday with the exception of the Swiss Franc which came under pressure after SNB acting Chairman Jordan promised to defend the 1.20 EUR/CHF peg with “utmost determination.” This week, many currencies including the British pound, Japanese Yen, Canadian, Australian and New Zealand dollars rose to their highest levels in months against the greenback, leaving the EUR/USD as the only currency pair failing to reach even a one month high. On an intraday basis we have seen quite a bit of volatility in the EUR/USD but since the beginning of the week, the pair has been trapped in a 2 cent range. The main reason why the euro has not enjoyed the same gains as other risky assets is because at the end of the day, investors are still unsure how the whole European sovereign debt crisis will play out. There is a good chance that a Greek PSI deal could be announced next week but this same possibility had existed week after week. The only difference this time around is that the Institute for International Finance’s Dallara will be headed for Athens this weekend along with his co-chair of the Greek creditors committee, Jean Lemierre from BNP Paribas. With the big wigs flying in, either tough decisions need to made or a deal is ready to be closed. If it is the latter and a deal is announced in the coming week, the EUR/USD could finally breakout to the upside.
Unfortunately even if Greece needs more help, Euro-area countries don’t appear willing to provide it. The region’s top rated countries met in Berlin to discuss Greece and according to Finland’s Finance Minister, the “130 billion euros agreed in October must be enough.” Originally the Eurogroup was planning to hold a meeting to talk about Greece on Monday but the meeting has since been scrapped. Although March 20 th is the day on which Greece will officially default on their loans if the next bailout funds are not released, they have agreed to submit a final debt swap offer to their private sector bondholders by February 13 th with the exchange of new Greek bonds scheduled to be completed by March 6th. This timeline would give creditors enough time to disburse additional aid to Greece before a major EUR14.4 billion bond redemption is due on March 20 th.
According to the latest CFTC report, speculators trimmed their net short EUR positions over the past week. Aside from the outcome of the Greek PSI negotiations, next week’s ECB monetary policy meeting could also be a potential catalyst for a breakout in the EUR. If the European Central Bank decides to add to its LTRO program, the EURUSD could experience steep losses as the prospect of near term balance sheet expansion makes the euro less attractive against the U.S. dollar. However, based upon recent economic data and the fluctuations in the financial markets, there is no need for the ECB to overreact. At one point, Portuguese 10 year bond yields had risen above 16.5 percent but now yields have fallen back down to 13 percent. Equities around the world have performed well over the past month while the EUR/USD rebounded off earlier lows. Retail sales contracted in December but consumer, business and investor confidence increased and for the time being, this improvement in sentiment may be enough for the ECB to wait to see how the market responds to the negotiations in Greece before stepping up their liquidity offerings.
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