Weekly Outlook: Euro to Remain Pressured After Greece

European majors weakened sharply last week despite interim rebound. The near term picture is cleared as Greece completed the PSI debt swap deal and is set for getting approval from EU and IMF for additional bailout. Also, Greece default was ruled official by ISDA for activation of the collective action clauses. Dollar, on the other hand, was supported by solid US data and strengthened broadly, with dollar index closed above 80 level again. Meanwhile, commodity currencies were relatively steady as supported by resilience in stocks despite intra-week selloff. After a week of volatility, there outlook didn't change in general. European majors will remain weak in near term while dollar will maintain it's strength, in particular against the Japanese yen. The main question is unresolved yet and that is, whether see massive stock selloff while drags down commodity currencies.

Greece finally completed the PSI debt swap deal with 85.8% participation. The finance ministry said that the overall participation rate would be lifted to as high as 95.7% after collective action clauses, or CAC, are triggered. That is, EUR 197b of the EUR 206b in eligible greek bonds would be swapped into a package of securities. For every EUR 100 in bonds, Greece's creditors will get EUR 15 in short term bonds issued by Eurozone's rescue funds. Also, they will get another EUR 31.5b in new Greek bonds that mature from 11 to 30 years. That's effective a 53.5% write-down in face value and the eventual haircut is around 74%. Eurozone finance ministers will meet this week in Brussels and Luxembourg Juncker has already signed that the path of approval of the EUR 130b second bailout is cleared. Meanwhile, IMF chief Lagarde also expressed that she'd propose to provide additional EUR 18b of funding to Greece over the next four years on top of the EUR 10b in the first bailout.

Later in the week, the International Swaps and Derivative Association said that Greece's bond swap constitutes a "credit event" for the use of the CAC that breached the rights of bond holders. An auction would be held on March 19 to determine how much of the CDS contracts would be paid. According to data from the Depository Trust & Clearing Corporation, the net volume of CDS on Greece stands at around $3.2b. Rating agency Fitch lowered Greece's rating to "restricted default" over the debt swap deal. Moody's also consider Greece defaulted as the bond exchange "represents a 'distressed exchange" and is therefore a debt default.

While European majors were broadly pressured, dollar remained firm over the week as supported by solid economic data. Non-farm payroll report showed 227k expansion in the job market in February, above expectation of 210k. The bigger surprise was found in January's figure, which was revised up from 243k to 284k. Unemployment rate was unchanged at 8.3%. ISM non-manufacturing index also unexpectedly improved to 57.3 in February.

China was also a focus last week. Premier Wen Jiabao said economic growth target is reduced to 7.5% this year while inflation target will stayed at 4%. This is the first time that China forecasts its growth at below 8% since 2005. CPI moderated sharply from 4.5% yoy to 3.2% yoy in February, below expectation of 3.4%m and was the lowest number in 20 months. Trade data released on Saturday showed that a deficit of $31.5b in February, largest since 1989. Import jumped by 39.6% yoy, rebounded strongly from the seasonally twisted -15.3% yoy fall in January. Meanwhile, exports rose 18.4% yoy. Overall, the data suggested that, background of easing inflation, additional easing policy would likely be implemented in near term to boost growth.
Five central banks met last week and all announced to let policy unchanged. More details to be found here in Review of Central Bank Meetings of the Week.