Week in FX Europe Mar 4-9

The Greece debt swap agreement was reached as 95.7 percent of private bondholders accepted or had clauses enacted to accept the deal. This will mean Greece has reduced their outstanding obligations by 132billion euros and the first step to securing another round of Eurozone rescue funds.

This record sovereign restructuring deal has brought praise from the E.U. top finance ministers and government representatives, but has also drawn harsh criticism from private bondholders like Bill Gross who said the swap had diminished the sanctity of bondholder’s contracts.

The ISDA will have to rule on the fate of the less than 5 percent of outstanding bonds that did not agree to the swap. A credit event can be a likely scenario, but with limited payouts after the historic swap.

The EUR benefited from the agreement, but traders are still pricing the possibility of a Greek default as elections approach and the parties who pushed for the deal have been falling behind in the polls.

Below are some other highlights of the week:

EUROPE

• EU: Risk sentiment started on the back foot after China revised growth prediction lower for 2012. China sets modest 2012 GDP growth target of 7.5%.
• EUR: EU services PMI was revised lower to 48.8 from the initial 49.4 estimate, falling from a 50.4 print last month. Weak prints came from Spain and Italy, at 41.9 and 44.1 respectively. Core-economies managed to sustain readings above 50. Germany again being the outlier, its PMI was revised a tad higher to 52.8 from 52.6. Meanwhile, the Irish PMI recovered strongly to 53.3 from 48.3.
• GBP: UK services PMI fell to 53.8 from 56.0 in January, below consensus for 55. The data is consistent with modest growth and some recovery from the weak Q4. These numbers would suggest that they are not weak enough to justify a further extension in QE.
• EU: Market weakness remains the dominant theme as Chinese authorities are now looking for a considerably softer growth outlook, and the upcoming deadline for the Greek debt swap.
• EU: Interest rate differentials continue to move against the single currency, following last week’s liquidity injection via the LTRO.
• EU: Euro-zone GDP contracted -0.3%, q/q, in Q3. Investment was particularly weak, dropping -0.7%, while household consumption and exports fell -0.4%.
• EU: Analysts note that price action suggests markets are “continuing to attach a high degree of credibility to the official firewall which has been built around Greece in recent months.” In the weeks ahead, rate differentials should begin to weigh on the currency.
• EUR: German factory orders surprised soft, falling -2.7% in February well below expectations for a +0.6% gain. Weakness was driven by foreign orders, while domestic orders remain in recovery mode.
• NOK: Norway’s manufacturing production picked up +1.1%, m/m, in January, above the consensus for +0.4% gain. Norway’s PMI releases were strong for January and February, suggesting a rebound in growth in Q1 is likely.
• NOK: Norges Bank indicated this week its intention to reduce the weighting of European equities and bonds in the investments of the Global Pension Fund. This could be negative for the EUR.
• EU: The EU wants to see “clear commitments and clarification from Hungary before aid talks can start”. The EU granted Hungary one month to respond to its requests. The EU has said it would take further action on Hungary’s excessive deficit.
• PLN: Poland’s central bank left its policy rate unchanged this week. Rhetoric from MPC members welcome zloty’s strength, as it helps to contain inflation.
• GER: German IP surprised strong, with a +1.6%, m/m, gain, above consents for +1.1%. December production was also revised a touch higher. This is setting a strong tone for Q1.
• CHF: Swiss headline CPI increased +0.3%, m/m, in February, but annual inflation remained in deflationary territory of -0.9%, y/y. The inflation outrun is broadly in line with the consensus forecasts and the SNB’s inflation trajectory.
• CHF: The SNB reported a consolidated profit of +CHF13.5b for 2011, following a loss of -CHF19.2b the previous year. In 2011, foreign currency positions contributed +CHF7.7b to this profit. The SNB also confirmed that it spent around +CHF17.8b in 2011 for FX intervention.
• Central Banks: The ECB (+1%) and BoE (+0.5%) kept their rate policy on hold this week. While still basking in the glow of the strong uptake to its most recent LTRO program, the ECB meeting made no any major announcements. With the BoE set to complete its latest +GBP50b in asset purchases in May, recent rhetoric from MPC members indicate that they judge the current policy as appropriate.

AMERICAS Week in FX

ASIA Week in FX

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