Euro Recovers Earlier Losses

Top Stories

• Euro gaps lower on failed Greek PSI talks
• Australian PPI cooler than forecast
• Nikkei flat at -0.1% Europe lower by -0.18%
• Oil at $98.34/bbl
• Gold at $1672/oz.

Overnight Eco

• AUD Producer Price Index (QoQ) (4Q) 0.3% vs. 0.4%
• EUR Euro-Zone Consumer Confidence (Jan A) n/a

Event Risk on Tap

• CAD Leading Indicators (MoM) (Dec)

Price Action

• USD/JPY back to 77.00
• AUD/USD rallies back to 1.0500 as opening gap filled
• GBP/USD contained below 1.5550
• EUR/USD gap filled off the weak weekend but 1.2950 contains

The EUR/USD gapped lower in early Asian session as trading opened for the week after Greek government officials failed to reach a definitive deal on with private investors on the restructuring of the country’s massive debt. The pair dropped to low of 1.2855 in thin Asian trading with many players absent due to the start of the Chinese New Year, but it recovered some of its losses in European trade when demand from Middle East took the pair back above the 1.2900 level.

The two sides appeared to be closing in on a deal that would give creditors new bonds paying a 3.5% coupon for shorter maturities and rising to a cap of 4.6% on longer-dated bonds. The average coupon would amount to around 4%. Speaking to television station Antenna, Mr. Charles Dallara the representative for private investors said, "Our offer, delivered to the (Greek) Prime Minister, is the maximum offer consistent with a voluntary PSI deal," adding, "I remain quite hopeful that various efforts will come together." 

However, people familiar with the matter said the IMF and Germany don't believe Greece's debt would return to sustainable levels if the average coupon on the new bonds is around 4%, pushing for a lower coupon. Greek newspaper Kathimerini reported that the European Commission, International Monetary Fund and European Central Bank requested a the report Friday to determine if the PSI deal will make the Greece’s debt sustainable.

The uncertainty regarding the deal between  private sector investors and Greece has renewed concerns regarding the viability of Greece as an EU member going forward. The  country is saddled with 160% debt to GDP ratio and faces a 14 Billion EUR repayment in March which it cannot meet unless it receives another tranche of bailout funds from EU. 

Despite the rebound  in  early European trade  the EUR/USD is likely to remain under pressure until the Greek debt issue is definitely settled. If the process continues to drag on without any resolution the euro could come back to test the session lows at 1.2875 as the day proceeds.

Elsewhere in Australia, the PPI data printed a bit cooler than expected at 0.3% versus 0.4% eyed. The data was generally ignored by the market as traders awaited tomorrow’s CPI figures  with Aussie rallying above the 1.0500 level for the first time since November. However, the weaker producer prices suggest that the CPI may miss to downside as well increasing the chances of another RBA rate cut at the next meeting in February. 

With no material data on the North American calendar today, traders will look to the other side of the pond for market moving news as the Eurogroup meeting starts at 13:30 GMT today, followed by the ESM meeting at 18;00. With no progress on the Greek PSI talks and staunch refusal by Germany to increase the size of the ESM fund, European officials could disappoint the market if they offer no new policy initiatives.  

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