EUR/USD Gets Greek Confidence Boost

  • Greek PM and Finance Minister calm markets with debt swap offer.
  • Oil higher as energy companies announce production cuts and lower revenues.
  • USD lower across the board after soft economic indicators.
  • RBNZ governor says rates to stay on hold unless forced to cut.

The USD continues to struggle after last week’s lower than expected fourth quarter gross domestic product (GDP) figure.

Softer data out of the U.S. combined with an optimistic outcome from Greek debt negotiations to push the EUR/USD higher. Newly elected Prime Minister Alexis Tsipras has begun a goodwill diplomatic tour to balance campaign promises at home with stern European expectations. Tsipras and newly appointed Finance Minister Yanis Varoufakis continue to be defiant seeking renegotiation, but have offered an olive branch in the form of a debt swap offer. Commodities have benefited from the drop in the USD as energy and base metals have surged erasing most to the losses of 2015.

Troika Negotiations on Tap

Greece is seeking to renegotiate its €320 billion bailout program. After winning elections last month with a strong anti-austerity platform, Tsipras rubbed Greek debt holders the wrong way. Tsipras and Varoufakis are not backing down from their promise to renegotiate Greece’s bailout terms, but they have offered a novel alternative. Instead of the debt haircut, market watchers were expecting Varoufakis to propose a debt swap: existing loans to be exchanged with growth linked funds. This deal would avoid the need for immediate losses for holders of Greek debt, but is will have to be based on the trust that the incoming government can really follow through on its promise to end corruption and monopolistic practices, while at the same time undoing some of the austerity measures put in place to repay existing debt.

The European Central Bank (ECB) has ruled out writing off any part of Greece’s debt. The same statement has been uttered by heads of state that are sympathetic with Greece but still expect the country to honor its agreement with the troika (the International Monetary Fund, ECB, and the European Commission). Germany as the biggest bond holder would have to agree to a new deal, which at this point looks unlikely. The fact that the offer does not include a haircut gives it a chance and the market is hopeful on the development. The prime minister will meet with European Commission President Jean-Claude Juncker in Brussels on Wednesday. Greek negotiators are playing hardball as they know the eurozone is not worried about the monetary figures of a default or a renegotiation but of the precedent it will set for other bailout recipients.

The ECB issued an ultimatum of sorts as payments have continued flowing in to avoid cutting off Greek banks’ access to liquidity. The estimated outflows from the financial system have been around € 11 billion after the election results. The local stock market has bounced back from losses, but it’s hard to see depositors going back to institutions that are caught in an international tug of war. Rebuilding the trust of the Greek people in the economy should also be high on Tsipras’s agenda as there will be no growth unless he manages it.

Yellow and Black Gold Prices Shift

Oil prices surged on Tuesday as producers announced spending cuts, along with comments from the Organization of the Petroleum Exporting Countries’ (OPEC) Secretary General Abdalla Salem el-Badri that the price of crude has hit the bottom of the barrel, in turn helping to drive the commodity’s price higher. Brent and West Texas crude have seen gains of around 3% in morning trade and have climbed around 16% since Friday. British Petroleum (BP) announced a slew of spending and job cuts as the result of its fourth-quarter results. BP CEO Bob Dudley said the excess supply driving oil prices lower will work its way out of the market, but it may take some time. OPEC’s el-Badri was more optimistic. He is forecasting a $200 per barrel price in the future.

Gold prices are lower after a lack of fundamental developments decreased investors’ appetite for the metal as a safe haven. The Greek debt situation which powered the yellow metal’s gains has cooled down but the outcome of the ongoing negotiations still has potential to spark a new rally. The Reserve Bank of Australia’s recent interest rate cut is also keeping gold’s demand low as inflation expectations are weak, and more monetary stimulus is expected from China, Japan, and Europe.

Kiwis Intend to Hold Rates Steady

Reserve Bank of New Zealand Governor Graeme Wheeler said that he expected to keep official interest rates steady for some time yesterday. The governor then added that only if the economy needs it from internal or external factors will that outlook change in the short term: “A period of stability is the most prudent option.”

Wheeler repeated that the New Zealand dollar remained “unjustified and unsustainable” despite recent falls and he expects further depreciation. Central bankers continue to make verbal interventions as they seek to lower the price of their currency to gain a competitive edge and boost growth. The biggest caveat is that for this strategy to work there must only be a few nations applying it, and now it seems that it is a true race for the bottom as the past stigma of currency devaluation has lost its bite.

The USD has stumbled all week long and the market is looking forward to the nonfarm payrolls (NFP) report on Friday. The biggest forex market indicator acts as a reading of U.S. economic health, and it comes at a time where there is growing doubts about its pace. The Federal Reserve has the luxury of time as other central banks have created a rate divergence expectation with the American central bank the first one of the majors to break the accommodative monetary cycle. The ADP private payroll figures will shed some light on the state of American employment today. While not heavily correlated with the NFP, a good private number can help the USD get some traction ahead of the headline employment report at the end of the week.

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Alfonso Esparza

Alfonso Esparza

Senior Currency Analyst at Market Pulse
Alfonso Esparza specializes in macro forex strategies for North American and major currency pairs. Upon joining OANDA in 2007, Alfonso Esparza established the MarketPulseFX blog and he has since written extensively about central banks and global economic and political trends. Alfonso has also worked as a professional currency trader focused on North America and emerging markets. He has been published by The MarketWatch, Reuters, the Wall Street Journal and The Globe and Mail, and he also appears regularly as a guest commentator on networks including Bloomberg and BNN. He holds a finance degree from the Monterrey Institute of Technology and Higher Education (ITESM) and an MBA with a specialization on financial engineering and marketing from the University of Toronto.
Alfonso Esparza