Euro Stays in Range after S&P Downgrade Greece to Selective Default

Euro's profit-taking retreat yesterday was rather brief. EUR/USD continues to stay firmly above 1.34 level so far today. Despite the new bailout fund, Greece's outlook has not turned any better. S&P's downgraded the country's credit rating to 'selective default', following Fitch Rating's downgrade to C and Moody's warning of a reduction to the lowest rating. Yet, European officials continued to defend Greek by said that the cut has 'no impact in the Greek banking sector as its liquidity effect has been address by the Bank of Greece and consequently by the EFSF'.

Germany's lower house approved the second Greek bailout package at 496-90 votes and 5 abstentions. However, a number supports came from the opposition parties, suggesting Chancellor Angela Merkel has lost some support from her centre-right coalition partners. After the meeting, the Chancellor stated that the risks associated with a Greek default and exit from the euro were 'incalculable, and therefore indefensible'. G-20 officials said that the Eurozone countries should strengthen their financial firepower before other countries would commit funding to help resolve the sovereign debt crisis. This suggested that Germany, which has been the largest investors of the bailout funds, would have to increase its funding even more. However, as Merkel has lost some support from her partners, it appears that Germany would be more reluctant to further fund EU stabilization funds.

Italy plans to sell up to EUR 6.25b of 5- and 10-ear bonds today. But main focus will be on tomorrow's second ECB three year LTRO. IN December, ECB loaned EUR 489b to 523 banks at interest rate of 1% in the first three year LTRO. Markets are expecting similar size this time.

On the data front, Japan retail sales rose 1.9% yoy in January. Eurozone confidence indicators, Swiss UBS consumption and UK CBI reported sales will be released in European session. US durable goods orders, S&P Case shiller house price index and conference board consumer confidence will also be released.