Weekly Review and Outlook
Euro to Remain Pressured after Greece Completed PSI, Officially Defaulted
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.
Dollar index jumped further to close at 80.04 last week despite intraday week pull back. The development is in line with the case that whole fall from 81.78 is completed with three waves down to 78.09. Initial bias will remain on the upside this week and break of 80.11 will confirm this bullish case. In that case, further rise should be seen through 81.78 resistance to extend the whole rebound from 72.69. Nonetheless, we're like to point out that upside moment has been clearly diminishing with bearish divergence condition in daily MACD. We'd expect strong resistance at 82.45/58 cluster resistance (61.8% projection of 74.72 to 81.78 from 78.09 at 82.45 and 61.8% retracement of 88.70 to 72.69 at 82.58) to limit upside to finish the whole rise from 72.69.
While DOW dipped to as low as 12734.86 last week, there was no follow through selling and the index recovered strongly towards the end of the week. At this point, we're holding on to the view that DOW should have topped at 13055.75 considering that firstly, daily MACD have been staying below signal line for some time. Secondly, the bearish divergence condition in daily MACD indicates that whole rise from 10404.49 should be completed too. We'd anticipate upside of the current recovery to be limited below 13055.75 and bring another fall. And a break of last week's low of 12734.86 should send DOW back through 12284.31 resistance turned support at least. When that happens, AUD, NZD and CAD should align with European majors and weaken against dollar.
The Week Ahead
Three central banks will meet this week. Fed is expected to keep rates unchanged this week. And, as the communication strategy was changed back in last meeting in January, there shouldn't be any drastic modification this time even though the statement could be fine-tuned. BoJ expanded the QE program in February by JPY 10T to 65T and named an explicit inflation target of 1%. No change is expected this week. SNB is expected to leave rates unchanged and maintain it's pledge to keep the 1.2 EUR/CHF floor. SNB is still sticking to it's plan to name a new president in April and this week's meeting will be a non-event. Meanwhile, development in Greece will continue to catch attention.
- Tuesday: BoJ rate decision; UK trade balance; German ZEW; US retail sales, FOMC
- Wednesday: UK employment; Swiss ZEW; Eurozone CPI; US import prices
- Thursday: SNB rate decision; US PPI, jobless claims, Empire state manufacturing, Philly Fed survey, PPI, TIC capital flow
- Friday: US CPI, industrial production, U of Michigan consumer sentiment
EUR/USD Weekly Outlook
Last week's development suggests that rebound from 1.2625 has likely completed with three waves up to 1.3486 already. More importantly, EUR/USD maintains a pattern of lower highs, lower lows since 1.4939 and such decline is still in progress. Initial bias is on the downside this week for 1.2974 support first. Break will affirm our bearish view and should target 1.2625 and below. On the upside, break of 1.3290 resistance is needed to signal completion of fall from 1.3486. Otherwise, we'll stay cautiously bearish even in case of recovery.
In the bigger picture, price actions from 1.6039 (2008 high) are treated as a long term consolidation pattern and there is no clear indication of completion yet. That is, price actions could remain corrective and relatively unpredictable. Current development suggest that the falling leg from 1.4939 is not finished yet and break of 1.2625 should pave the way to 1.1875 low. On the upside, we'd prefer to see sustained trading above 55 weeks EMA (now 1.3569) to indicate the start of another rising leg inside the pattern.
In the long term picture, EUR/USD turned into a long term consolidation pattern since reaching 1.6039 in 2008. Such consolidation is still in progress and we'd expect range trading to continue for some time between 1.1639 and 1.6039. The range sounds a bit uselessly large but yes, it's that large. For long term traders, anywhere below 76.4% retracement of 1.1639 to 1.6039 at 1.2677 could be treated as a buy zone while above 23.6% retracement at 1.5001 is a sell zone, until there is clear indication of breakout.
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