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Wednesday, 22 February 2012 14:48

Euro Profits Hardly From Greek Debt Deal

Sunrise Market Commentary

  • Fixed Income: Markets yawn over second Greek package
    The market reaction after Greece secured a second bailout was very subdued. Global core bonds digested small losses at the expense of riskier assets. Today, the eco calendar is interesting with EMU PMI's.
  • Currencies Euro profits hardly from Greek debt deal.
    On Tuesday, EUR/USD made only some moderate gains after the Eurogroup reached a Greek debt deal. The range top of EUR/USD and EUR/GBP came within reach, but no real test occurs. USD/JPY extends its impressive rally and tries to regain the psychological barrier of 80.00. Euro traders will now look for a new guide in the 'post Greece' era

The Sunrise Headlines

  • US Equities reversed their gains yesterday to end the session broadly unchanged. The S&P came close to important resistance levels but dropped lower afterwards. This morning, most Asian shares trade in positive territory.
  • Greece must complete a swap of private holding of its debt as part of the second rescue package by around March 10 at the latest, caretaker Prime Minister Papademos said yesterday.
  • The Obama administration will propose lowering the top income-tax rate for corporations to 28% from 35%, but would raise overall tax revenue by eliminating dozens of popular deductions in an effort to restructure the corporate tax code, the WSJ said.
  • Private bondholders have pledged 'strong participation' in the bailout deal agreed for Greece, Charles Dallara, managing director of the IIF said yesterday, while another IIF representative said bondholders would lose more than 70% in the deal.
  • The International Atomic Agency has reported that it held a disappointing meeting with Iran this week over the country's nuclear programme, with no agreement reached on any of the key issues under discussion. Continued tensions in Iran pushed the Brent oil price ($121.50) to a new 9-month high.
  • China's HSBC flash manufacturing PMI picked slightly up in February (to 49.7 from 48.8), but new export orders shrank the most in eight months, defying expectations of a revival after Lunar New Year holidays.
  • Today, the eco calendar heats up with the PMI's and industrial new orders in the euro zone, US existing home sales and Bank of England Minutes

Currencies: Euro Profits Hardly From Greek Debt Deal

EUR/USD

On Tuesday, EUR/USD traders were looking for a new equilibrium after the Greek bailout deal. There was no euphoria on the agreement. On the stock market and also in EUR/USD there was even some kind of 'buy the rumour sell the fact' reaction. EUR/USD didn't succeed a test of the 1.3322 range top.

Yesterday morning at the open of European markets, it was already clear that there was no euphoria on the Greek debt deal. The reaction on Asian equity markets was limited and the spike in EUR/USD after the announcement of the agreement was short-lived. This lack of reaction on both the equity and currency market might have been due to different factors. Firstly, even after the deal there are still several issues on Greek debt sustainability. There is also a big execution risk. On the other hand, yesterday's price reaction might be an illustration that Greece was/is not that much of an important issue for trading on global markets anymore. Both factors might have been in play. We consider it more as some kind of 'buy-to-rumour, sell the fact' repositioning. The correction was extended early in US trading. EUR/USD dropped to the 1.32 area early in US trading. There was no important macro news from the US and EUR/USD hovered up and down in the mid 1.32 area. The pair closed a rather uneventful trading session in the 1.3234 area, little changed from the 1.3243 level on Monday evening.

Today, attention of markets might move away from Greece and look for other issues. The Chinese HSBC PMI of the manufacturing sector was still just below the 50.00 mark, but Asian stocks are mostly in positive territory. In the EMU, the advance reading of the February PMI's is interesting. We expect a further improvement, especially for the index of the manufacturing sector (services were already materially higher last month). The data might be cautiously supportive for risk taking on the European markets and for EUR/USD. The US existing home sales will probably only be of second tier importance. So, we might see more wait-andsee behaviour in EUR/USD. Technical considerations might play a role, too.

Yesterday's failure of EUR/USD to test the range top at 1.3322 even after the conclusion of a Greek deal might be an indication for euro bulls that the topside is difficult for now. Further down the road, we keep an eye on how the market will look forward to next week's 3-j LTRO and its impact on European markets. From a fundamental point of view, such a new injection of liquidity should be no support for the single currency. We stay open-minded, but for now we see it as an additional factor why the topside in EUR/USD should be that easy short-term.

Technical Picture. Till mid January, EUR/USD was captured in a standing downtrend. EUR/USD reached a new reaction low at 1.2624 after the S&P downgrade of several EMU countries, but a test of the 1.2588 level didn't occur. The decline in EUR/USD was exhausted and a technical rebound kicked in. The pair regained the 1.2858/79 area (Previous low/reaction high) and broke out of a downward trend channel. The pair got additional support from the January Fed decision. EUR/USD moved above the 1.3146/1.3234 (LT neckline/reaction high) resistance, improving the short term picture in this cross rate. However, there were no follow-through gains on this technical break. Of late, we were not convinced that the euro was at the eve of a new up-leg, even as the technical picture had improved. Last week, the pair dropped temporary below the bottom of the 1.3026-1.3322 ST trading range. However, the test was also rejected. EUR/USD within striking distance of the 1.3322 range top, but we assume that a break of the topside will remain difficult

EUR/USD: euro fails to profit from Greek rescue deal

Support S1: 1.3200/92 Reaction low/STMA+MTMA S2: 1.3187/73Reaction lows S3: 1.3115 Reaction low hourly. S4: 1.3062: Break-up area

Resistance R1: 1.3293: Reaction high R2:1.3322: Reaction high R3:1.3459: Reaction high

The pair moving into overbought territory

USD/JPY

On Tuesday, USD/JPY took a breather after the recent rally. The pair settled in a narrow range roughly between 79.50 and 79.85. The moderate reaction in most other markets on the Greek debt deal (especially in the bond markets) prevent further USD/JPY gains.

Overnight, the USD/JPY tried a new upleg and the pair is trying to regain the psychological barrier of USD/JPY 80. We didn't see any specific news. Japanese markets are still captured by the positive spiral that started after last week's BOJ policy easing. USD/JPY and Japanese equity markets are in a mutually reinforcing up-trend. For now, there is no reason to row against the tide.

USD/JPY extends impressive rally

Support S1: 79.58/55: STMA/Post intervention spike. S2:79.36/20 Reaction low + MTMA R3:78.99/80: Reaction lows hourly. S4: 78.20: Reaction low.

Resistance R1: 80.08: Reaction high? R2: 80.24: August high R3: 80.83: Previous reaction high.

The pair is in overbought territory

EUR/GBP

On Tuesday, the Greek debt deal didn't change the broader picture for EUR/GBP trading. The pair held within striking distance of the 0.8422 range top, but a real test/break didn't occur.

EUR/GBP jumped higher in Asian after the Finance Ministers of the Eurogroup announced that they had reached an agreement on an additional Greek bailout plan. The pair reached an intraday high at 0.8383 already before the open of the European markets, but as was the case for EUR/USD, there were no follow through gains. EUR/GBP hovered up and down in the 0.8350/80 area. European equity markets and the euro failed to profit from the agreement. Mid-morning, the January UK public finance data came out better than expected. As such this is good news for the UK economy. However, from a monetary policy point of view (and for the currency) this is somewhat of a mixed signal. If the government meets its budget target by a tight fiscal policy, this might be a good reason for the BoE to maintain its policy accommodation. So, the report didn't change the course of events for EUR/GBP trading. Later in the session, cable underperformed EUR/USD and EUR/GBP filled offers in the 0.8400 around the fixing late in Europe. The pair closed the session at 0.8388, compared to 0.8355 on Monday evening.

Today, the calendar of eco data in the UK is empty, but this morning the minutes of the latest BoE meeting will be published. The minutes are always interesting. However, the logic behind the BoE raising the amount of asset purchases was already in extenso explained in the communiqué after the decision, the inflation report and the BoE press conference after the report and the exchange of letters between governor King and the Chancellor of the exchequer. So, in this context, we don't expected the minutes to provide any high profile info on the intentions of the BoE going forward. The tone should be soft, but no indications on a commitment further down the road. The voting pattern will be the most valuable piece of information. EUR/GBP is currently again near the 0.8422 range. However, this has been the case several times of late. We would be surprised to see the pair move beyond the barrier without any important news.

Global context. In December, the EUR/GBP cross rate joined the broader market repositioning out of the euro. Investors are well aware that the ECB will keep monetary policy extremely loose in the foreseeable future and that even further policy easing is possible. The poor eco outlook and the unresolved debt crisis caused the euro to lose its advantage over the UK currency. Over the last month, the downside was blocked, as the 0.8222 support held and several other key support levels are lining up (0.8142/0.8068). On the topside, the range top in the 0.8400/22 area was also tested several times, but a break failed. The sideways consolidation pattern remains firmly in place.

EUR/GBP: moving higher in the range on Greek debt deal.

Support S1: 0.8351/40Reaction lows +MTMA S3: 0.8278/64: Reaction lows S4: :0.8222 Range bottom.

Resistance R1: 0.8384 Reaction high hourly R2:0.8402: Reaction high R3:0.8422 Range top R4: 0.8485: Previous reaction low

The pair is moving into overbought territory

News

EMU: consumer confidence improves for 2nd straight month

In February, European Commission's consumer confidence improved for a second straight month, according to the advance estimate. Consumer confidence rose from -20.7 to -20.2, marginally weaker than the consensus estimate of -20.1. This is the second consecutive improvement in consumer sentiment, suggesting that not only business sentiment is picking up, but also consumers are a bit less pessimistic. Consumer confidence is, however, still well below the LT average (-12.2) as austerity measures are weighing on consumers' budgets and unemployment is still peaking. In the coming months however, we believe that consumer sentiment will improve further as the economic outlook is brightening and uncertainty around Greece should ease somewhat.

Other: UK on track to meet borrowing target

The UK public sector posted its biggest budget surplus in four years in January. Revenues (excluding interventions) exceeded spending by £7.8 billion, compared to a surplus of £5.2 billion a year earlier. The consensus was looking for lower surplus of £6.3 billion. The surplus including government support for the banks was £10.7 billion. The ONS figures showed total government receipts rose 2.8% Y/Y to a record high of £60.9 billion. January is usually the biggest tax collection month of the year. Total government expenditure rose at roughly the same pace. The improvement in the finances was driven almost entirely by lower borrowing by local authorities, reflecting spending cuts in services such as refuse collection. Only two months are left in the UK financial year, which runs through March, indicating that the UK government is well on track to meet the borrowing target of £127 billion. Nevertheless, the OBR warned that tax receipts in the remaining two months is likely to be weak due to smaller bonuses in the financial sector and cited the risk that the central government spending could accelerate. On March 12, UK Chancellor of the Exchequer Osborne will reveal his new budget for the year 2012-2013.

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