The US Dollar slumped against most major currencies to start the week as China cut interest rates amid hopes that a Greek bailout deal will emerge today.
Talking Points
- Dollar, Yen Slump in Asia as China Cuts Reserve Requirement Ratio by 50bps
- Eurozone FinMin Summit in Focus as Traders Wait for Greek Bailout Accord
- Risk Appetite Expected to Falter Again, Yielding Dollar Buying Opportunities
The US Dollar and Japanese Yen fell against their major counterparts as stocks rose in overnight trade, marking an improvement in risk appetite to start the trading week and sapping demand for the go-to safe haven currencies. The MSCI Asia Pacific regional benchmark equity index rose 0.9 percent after China cut the reserve-requirement ratio for the country’s banks by 50bps effective February 24. The move increases the supply of loan-able funds by allowing banks to lend out a greater percentage of their deposits, reducing borrowing costs with the hope of stoking economic activity.
Optimism was compounded by hopeful anticipation of a final deal on the second Greek bailout package as Eurozone finance ministers gather for a meeting in Brussels today. Traders are betting the sit-down will culminate in the provision of €130 billion in EU/IMF funding to stave off a Greek default as a large tranche of maturing debt comes due on March 20. The accord must deliver on two elements: Athens has to iron out the terms of a bond swap with its private-sector creditors – a scheme meant to ease its debt burden by dismissing as much as 70 percent of what is owed and exchanging the rest for longer-dated paper – as well as put to rest EU officials’ concerns about implementation of new austerity measures.
The long history of flawed fixes to the debt crisis unveiled over the past three years suggests that the very existence of an accord is likely to prove initially supportive for risk appetite, regardless of its merits. This spells trouble for safe-haven currencies at least at the onset, but that is unlikely to last. As we discussed earlier, a Greek default (even a disorderly one) is no longer the danger it once was considering EU banks borrowed enough capital through the ECB’s 3-year LTRO in December to assure a credit squeeze would probably not materialize. This means whatever EU officials come up with will not amount to a meaningful change in the existing fundamental landscape, with traders quickly shifting their focus back to the overall macroeconomic landscape.
On balance, it seems likely that this transition will prove negative for risk appetite. Economists’ forecasts suggest the Eurozone – collectively the world’s largest economy – will sink into recession this year, severely denting global performance expectations as a whole. Indeed, economists’ median world GDP expectations for 2012 have been sinking precipitously since early August. The reemergence of this stark reality is likely to be punishing for the Euro as well as sentiment-sensitive currencies like the Australian, New Zealand and Canadian Dollars. With this in mind, we are looking for US Dollar buying opportunities to emerge in the days ahead.
Asia Session: What Happened
| GMT | CCY | EVENT | ACT | EXP | PREV |
| 21:30 | NZD | Performance Services Index (JAN) | 53.6 | - | 50.9 (R+) |
| 21:45 | NZD | Producer Prices – Inputs (QoQ) (4Q) | 0.5% | 0.4% | 0.6% |
| 21:45 | NZD | Producer Prices – Outputs (QoQ) (4Q) | 0.1% | 0.5% | 0.2% |
| 23:50 | JPY | Merchandise Trade Balance Total (¥) (JAN) | -1475B | -1456.3B | -205.6B (R-) |
| 23:50 | JPY | Adj Merchandise Trade Balance (¥) (JAN) | -612.8B | -847.8B | -568.7B (R-) |
| 23:50 | JPY | Merchandise Trade Exports (YoY) (JAN) | -9.3 | -9.4 | -8.0 |
| 23:50 | JPY | Merchandise Trade Imports (YoY) (JAN) | 9.8 | 9.6 | 8.1 |
| 0:01 | GBP | Rightmove House Prices (MoM) (FEB) | 4.1% | - | -0.8% |
| 0:01 | GBP | Rightmove House Prices (YoY) (FEB) | 1.4% | - | 0.4% |
| 5:00 | JPY | Coincident Index (DEC F) | 93.6 | - | 93.2 |
| 5:00 | JPY | Leading Index (DEC F) | 94.0 | - | 94.3 |
| 5:30 | JPY | Nationwide Dept Store Sales (YoY) (JAN) | -1.1% | - | 0.8% |
| 5:30 | JPY | Tokyo Dept Store Sales (YoY) (JAN) | -3.1% | - | 0.3% |
| 7:00 | JPY | Convenience Store Sales (YoY) (JAN) | 1.7% | - | 4.1% |
Euro Session: What to Expect
| GMT | CCY | EVENT | EXP | PREV | IMPACT |
| 7:45 | EUR | French Own Company Production Outlook (FEB) | - | -6 | Low |
| 7:45 | EUR | French Business Confidence Indicator (FEB) | 92 | 91 | Low |
| 7:45 | EUR | French Production Outlook Indicator (FEB) | -36 | -37 | Low |
| 9:00 | EUR | Italian Industrial Orders (MoM) (DEC) | 0.4% | 0.1% | Low |
| 9:00 | EUR | Italian Industrial Orders (YoY) (DEC) | -5.6% | -0.7% | Low |
| 9:00 | EUR | Italian Industrial Sales (MoM) (DEC) | - | 0.0% | Low |
| 9:00 | EUR | Italian Industrial Sales (YoY) (DEC) | - | 0.2% | Low |
| 14:30 | EUR | Eurozone Finance Ministers Meet in Brussels | - | - | High |
Critical Levels
| CCY | SUPPORT | RESISTANCE |
| EURUSD | 1.3104 | 1.3234 |
| GBPUSD | 1.5791 | 1.5898 |
--- Written by Ilya Spivak, Currency Strategist for Dailyfx.com
To contact Ilya, e-mail ispivak@dailyfx.com. Follow me on Twitter at @IlyaSpivak
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