FX Daily Planet: London Open

FX Daily Planet: London Open

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View for the day

Euro zone finance ministers agreed on the terms of financial support for Greece at the extraordinary meeting held on Sunday. The agreement prescribes the following: (1) bilateral loans from European governments for 3 years; (2) up to €30bn lending by euro area members states for the first year, in addition to the IMF's contribution (€12.5 to 15bn reportedly); (3) lending rates near 5% calculated as 3-month euribor plus 300bp spread with further 100bp for more than 3 years and plus 50bp for operational cost; (4) IMF loans priced according to their formula (currently 3.25% for a loan of 10x quota). We think that these terms are good but not great; the funds would cover all of Greece's remaining 2010 borrowing requirement (€30bn) but not 2011 redemptions (€22bn). Funding is almost 200bp lower than Greece's current 3-yr rate (6.98%), but is more expensive than IMF terms or weighted-average Euro area bond yields. The news favoured EUR in the Monday Asian session; EUR surged in the early morning session and maintained the firm foot while USD and JPY underperformed within the G-10 currencies (both down 1.4% against EUR respectively). Regarding the Greek issue (the country has not requested the financial assist yet), 3-month T-bill auction will be a key near-term risk.

China is as important for the short-term market trend as Greece is. With the resumption in the downtrend in USD/CNY being only a matter of time, in this week, China President Hu visits the US on Monday/Tuesday and some key data (1Q GDP, Mar. CPI, IP and fixed investments) from China are due for release on Thursday. Thus, the market would continue to be extremely sensitive to the relevant headlines and results from economic releases. Beyond the CNY revaluation, we see a rate hike by the PBoC as an immediate risk. If the PBoC decides to raise its policy rate, it should heighten speculation over the CNY revaluation as well. We believe that actual CNY revaluation and heightening speculation on it should be negative for EUR and positive for commodity FX, CHF and JPY in the very near-term, though we do not expect any sustainable moves.

Finally, the Q1 earning season begins this week. Earning report by Alcoa is due today and it will be followed by some financials (JPM, BAC) and technologies (INTC, AMD, GOOG). We continue to believe that a close to 80% rally in the S&P500 over the past year does not imply an overvaluation and see further upsides. Continuous rally in stocks should favor high beta FX at the cost of USD and JPY.

Overnight news

JPY: March M2 growth almost in line with expectation at 2.6%oya.

AUD: February home loans weaker than expected at -1.8%m/m vs -1.0% cons.

AUD: RBA Assistant Governor Debelle said, “The situation where we needed historically low interest rates has passed,” and “So we’re moving back to something around average levels, which is not far from where we are now”.

EUR: Following their extraordinary meeting on Sunday, EU finance ministers detailed operational issues regarding an EU/IMF lending facility for Greece, if the country asks for assistance. They would offer as much as 30bn euros to Greece in three-year loans in 2010 at around 5%.

IMM: aggregate spec longs in USD declined to $4.5bn from $7.4bn in the preceding week; EUR shorts shrank to $11.3bn from the record high $14.4bn while JPY shorts further expanded to $5.7bn from $4.1bn.

Today’s watchlist (all times BST; +9hrs for Sydney, +8hrs for Tokyo, -5hrs for New York)

CAD: Mar housing starts (000s, saar) @13:15 (JPM: 206, Cons: 205)

USD: Mar Federal budget ($bn) @19 :00 (Cons : -105.0)

NZD: Mar credit card spending (%m/m, sa) @ (Prev: -0.4)

GBP: Mar RICS house price survey (%bal, sa) @00:01 (Prev; 17.0)

JPY: Mar corporate goods service (%oya) @00:50 (JPM: -1.1, Cons: -1.1)

Overnight price action

FX: EUR outperforming the most among the majors, rising 1.3% versus USD and followed by SEK, which rose 1.2% against USD; NZD and CAD underperforming as well as USD.

FX vol: front end vols rose 0.3-0.4vols in USD/JPY and JPY crosses

Commodities: oil up 0.3% to $85.2/barrel and gold up 0.4% to $1165.4/oz.

Bonds: JGB yields mostly unchanged and slightly up by 1bp in 7-years and out.

Equities: mixed performances in stocks with the Nikkei up close to 1% while the Shanghai is down 0.6%

Technical View for the day

The last trading week was relatively calm and didn’t really provide groundbreaking news as the prevailing trends remained pretty much intact. What can be described as the surprise of the week was definitely the strength of the British Pound particularly considering the increasing uncertainty in connection with the upcoming general elections. But gaining ground across board after having defended weekly trend line support in Cable twice, after displaying a key-reversal week up from key-Fib.-support in GBP/CHF two weeks ago and after breaking key-pivotal resistance at 139.28 in GBP/JPY the question is conclusively coming up whether GBP might have bottomed out on big scale. The idea is certainly appealing as it would be the least expected but from a pure charting perspective it requires stronger evidence like a break above 1.5584/1.5709 in Cable, a break above 147.53/148.55 in GBP/JPY and a break below triangle support at 0.8671 in EUR/GBP to be confirmed. As for EUR/USD, the settlement on the Greece issue has certainly led to a short-covering rally but unless key-resistance between 1.3789 and 1.3840 is taken out the general downtrend remains fully intact.

ENDS

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