Euro Leads European Currencies Lower on Greek PSI Deal - Why?

Talking Points

• Euro Leads European Currencies Lower After Successful Greek PSI Results
• Australian, Canadian and NZ Dollars Await Cues from US Employment Data
• Japanese Yen Sold as FinMin Azumi Hints More BOJ Easing May Be Ahead

The Euro, British Pound and Swiss Franc pushed sharply lower against the US Dollar overnight following the long-awaited announcement of Greek PSI results. Athens reported that 85.8 percent of investors holding debt governed by Greek law and 69 percent of those governed by UK law participated in the bond swap. After invoking collective action clauses (CACs) meant to cajole hold-outs into the program, Greece was able to produce a 95.7 percent participation rate. This result falls within Eurozone policymakers’ desired range of 95-100 percent needed to release the first tranche of funding through the €130 billion second EU/IMF bailout program.

A successful PSI outing confirmed that Greece would probably not default after all when €14.5 billion in maturing obligations came due on March 20. Although a blow-up in the debt-strapped country has not posed the grave threat it once did after the ECB’s LTRO operations assured it would almost certainly not result in a market-wide credit squeeze, the markets’ general aversion to uncertainty kept investors uneasy nonetheless until the PSI arrangement was fully realized. Having priced in just such an outcome in the lead-up to today’s announcement, the markets promptly returned their focus to growth-linked concerns.

Needless to say, this did not bode well for the Euro. It likewise weighed on the currencies of countries that heavily export to the currency bloc (GBP, CHF, NOK, SEK) and whose economies will thereby suffer from the recession widely expected to afflict the region this year. Comments from ECB President Mario Draghi following yesterday’s policy announcement suddenly got their opportunity to capture the spotlight, with traders appearing to suddenly realize that he was alluding to the threat of stagflation. Draghi said that inflation would exceed the central banks’ 2 percent target this year but chalked it up to a rise in energy prices, adding that growth faced “downside risks” and predicting that recovery would be “very, very gradual”.

Meanwhile, the greenback was little changed against the sentiment-sensitive commodity currency complex. For the Australian, New Zealand and Canadian Dollars the standstill appears to reflect traders’ unwillingness to commit to a directional bias ahead of the upcoming US employment report. The markets are looking to an increasingly firming recovery in the US to offset headwinds facing global growth from recession in the Eurozone and a slowdown in China in 2012. With that in mind, the fortunes of the US labor market a critical consideration for risk appetite at large. Expectations call for the economy to add 210K jobs in February, capping the strongest there-month period of employment growth since the first quarter of 2006.

The Yen declined against the US currency after Japanese Finance Minister Jun Azumi said the BOJ’s efforts to ease monetary policy have had a good impact on the exchange rate and that he expected the central bank to continue to take “appropriate steps”. This stoked expectations that BOJ Governor Maasaki Shirakawa and company may be preparing additional easing measures.

Asia Session: What Happened

Euro Session: What to Expect

Critical Levels

--- Written by Ilya Spivak, Currency Strategist for Dailyfx.com

To contact Ilya, e-mail ispivak@dailyfx.com. Follow Ilya on Twitter at @IlyaSpivak

To be added to Ilya's e-mail distribution list, send a note with subject line "Distribution List" to ispivak@dailyfx.com