Greece bail-out doubts spook risk currencies

The challenge for markets on Tuesday was distinguishing between political posturing and serious misgivings – reportedly on the part of Germany, Finland and Austria - about agreeing to the second bail-out package to Greece, either without even Stronger conditionality – or at all. Local Greek press reports suggested that these countries were now seeking the insertion of ‘euro exit’ clauses into the second bail out that would compel Greece to leave the euro if the conditions set for the approval of the second bail-out fail to be met. EU officials meanwhile maintained that it was simply the lack of written assurances from the two main party leaders in Greece that was preventing the formal convening of an Eco Fin meeting to finalise the bailout. Separately, Bundesbank President Jens Weidmann told Handel blatt that he rejected the participation of central banks in a voluntary Greek debt haircut. Unclear was whether this means any form of transfer of Greek SMP holdings off the ECB/national central banks’ balance sheets at less than par, or the notion of the ECB suffering loses on its holdings. EURUSD inevitably suffered as doubts grow over whether the Greek deal will get done and a disorderly default averted, and higher beta risk currencies suffered just as much, EURAUD ending the NY session fairly flat on the day.

Greece promises to bear gifts on Wednesday. Bubo objections may not count

With the ECB ‘Under New Management’ since November, the ability of Bundesbankers to shape ECB Council decisions is evidently much diminished. As such it is doubtful whether the Bundesbank aforementioned objections are going to prevent an Official Sector Involvement (OSI) in the new Greek bail-out along the lines previously outlined (whereby Eurozone central banks suffer neither losses nor enjoy profits on their SMP holdings). Media reports that Greek conservative leader Samaris would deliver his written commitment to the reform/austerity programme agreed by the Greek cabinet on Wednesday will, if confirmed, likely go some way to bringing the euro higher and the USD generally lower. EU leaders plan to meet by phone today but if, following news that Mr Samaris has signed a letter of commitment, EU leaders are still seen to be procrastinating over a formal meeting, concerns will rise that Germany (et al) may indeed have second thoughts about granting Greece fresh assistance. Our base case remains that the deal will get done and the euro will rally – but risk is this could be some days – or even weeks – away.

USDJPY forecast upgrades may be premature; EZ Q4 GDP, FOMC minutes due

The rush to upgrade forecast for USDJPY in the wake of the BoJ’s decision to further expand its balance sheet on Tuesday and to formally adopt a 1% inflation target, remains premature in our view. BoJ governor Shirakawa made clear in his post meeting press conference that the change in wording on prices in the BoJ statement does not mean the BoJ will guide policy differently. And (as per the chart below) BoJ balance sheet expansion via asset purchases has patently failed to reverse the course of USDJPY, either in the past three years or the prior QE experiment in 2002-2004. Eurozone GDP data today should confirm that the region went ex-growth, but with (core) country growth indicators turning up since then, impact may be slight. The BoE’s Inflation Report meanwhile will merely validate the decision to do more QE. The FOMC minutes later Wednesday will, we expect, be dovish overall and somewhat contradict the bond market’s rethink of QE3 prospects and the veracity of the end-2014 low rate commitments. This could mean a somewhat softer dollar out of the minutes.

USD-INR FEB 2012 MCX-SX FUTURE:-

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GBPINR FEB 2012 MCX FUTURE :-

JPYINR FEB 2012 MCX FUTURE :-

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