FX news and analysis 6th Mar

USD

The dollar rose on Tuesday as markets sold off and grew increasingly risk averse. The main reason was speculation that private bond holders might refuse to participate in a voluntary swap of their Greek sovereign holdings. The deadline for participation is Thursday evening. A group of the 12 largest bondholders known as the steering committee of the IIF had already greed to back the deal but they only account for about 25% of the debt. Its possible other holders might not participate as readily. The government needs a 75% take-up for the swap to have a chance of going through. Apart from that there was no real data for the U.S and Euro-zone GDP revisions for the 4th quarter remained unchanged. The next big release is on Friday when Non-Farm Payrolls comes out. As a result of the Fed's employment mandate a higher print could strengthen the dollar as it will reduce the probability of the Fed introducing more monetary easing.

EUR

Euro fell heavily as fears over Greece hit risk appetite. Investors were concerned that the country might not be able to get the private sector to participate in a bond swap to reduce its debt burden as part of the 130bn bailout package agreed with the E.U. So far only 25% of private bondholders have guaranteed their support (essentially the 12 largest holders which comprise the steering group of the IIF). There are fears that the rest may refuse or even take legal action against the move. Greece has said that if 75% or more participate then it may have grounds to use a CAC (Collective Action Clause) to force the others to also accept the deal. A failure to achieve even 75% however could mean a probable end to the whole Greek bailout. This in turn might cause a default by Greece. Other news from the euro-zone showed that GDP revisions for the 4th quarter remained the same, although other data was negative, with Gross Fixed Capital (4Q) falling by -0.7% when -0.4% had been expected and Household Consumption at -0.4% when analysts' estimates were for -0.2% and previous print was 0.3%. The lacklustre data encouraged speculation the ECB might announce a rate cut at its Thursday rate meeting.

GBP

The pound fell heavily following a rise in risk aversion mainly as a result of renewed euro-zone debt fears. Data also weighed after showing a slow-down in the housing market. Halifax House Prices in February fell by -0.5% MoM when a 0.3% rise had been expected and January saw a 0.6% rise. The data scuppered hopes of a house price revival after the much stronger data last month. Sterling further sold off after concerns grew that private holders of Greek debt might not be so keen to participate in the debt swap agreement which would see a loss of over 50% in the nominal value of their holdings, despite various cash incentives and sweeteners. A report from the IIF, which represents the private sector in the deal, warned that failure to secure the cooperation of enough private bondholders would result in a default costing Europe over a trillion euros. It remains to be seen whether enough bondholders will take part the deal by the deadline on Thursday evening. Also on Thursday is the BOE rate meeting although a change of policy is not expected.

JPY

The yen rose on a mixture of renewed euro-zone concerns and a fall in yield currencies after the Royal Bank of Australia maintained rates at 4.25 and kept the door open to quantitative easing. Concerns over whether private investors would voluntarily participate in the Greek debt-swap deal hit risk appetite as a failure to seal the deal would lead to a sovereign debt default and this further supplied the yen. Many analysts saw today's gains as temporary, however, as a continuation of the January surge is expected in time. The currency faces major challenges, such as uncertainty over the future of the country's nuclear industry and the cost of imported fuel, which is causing a trade deficit. Also, political opinion remains staunchly anti-nuclear. The BOJ's ultra-loose monetary policy is another negative against the yen. The outlook therefore remains bearish – barring another big crisis in the euro-zone which is nevertheless still quite possible.