Risk likes Greek PM’s hopes for PSI, Troika deals by Friday

Publication date: 31 January 2012
Author: Andrew Timothy Robinson, Saxo Bank

There was a mild recovery in risk sentiment across currency markets in Asia Tuesday, but we are still adopting a wait-and-see attitude on the Greek debt swap deal despite rhetoric from the Greek leadership.

Greece’s PM Papademos appeared on the wires saying that “significant progress” has been made in both the PSI talks and negotiations with the Troika on a new loan package and was seeking to conclude both efforts by the end of the week. This was possibly one of the reasons why risk was a tad buoyant – but we know from history how these announcements can be delayed.

USDJPY was also a major mover, extending its recent slide to touch a fresh low since the intervention last October. This prompted early jawboning from Finance Minister Azumi, the first in a while, warning that firm steps would be taken against excessive, speculative currency moves. The intervention-triggering 75.80 level looks firmly in the sights.

In data news, there was a raft from Japan early this morning – the jobless rate saw a marginal increase to 4.6 percent from 4.5 percent, its highest level since July, despite a more positive print in the jobs-to-applicants ratio of 0.71 from 0.69. Household spending remained weak amid weak income growth and uncertainty over the economy. Spending fell 1.0 percent in December following a 1.3 percent decline in November but compared to a year earlier it rose 0.5 percent (-0.1 percent was expected). Industrial production bounced back by a solid 4.0 percent in December, more than reversing a 2.7 percent m/m decline in November. Predictions on manufacturers’ output, the core component of production, also remained above board but at a reduced pace with January’s forecast revised down to a 2.5 percent gain versus a preliminary +3.4 percent while February’s output expected to increase by 1.2 percent now that supply disruptions out of Thailand have been resolved.

On the Australian front, business conditions and confidence were steady and private sector credit was in line with forecasts at +0.3 percent m/m, unchanged from the previous month.

In the overnight European and US sessions, the EUR sagged as Greek debt swap negotiations continued while Portugal became the next focus of attention with bond yields rising and CDS prices widening which dragged those of Italy and Spain along with them. It is evident will not be out of the woods just by resolving the Greek situation. The Italian bond auction saw a lower participation and fell just short of the €8 bln target adding more pressure on the EUR. There were few astounding developments from the EU summit though the fiscal compact deal saw further progress with 25 out of 27 EU states signing up (Britain and Czech Republic not taking part).

AUD tracked the EUR lower as Fitch placed 4 Australian banks on review for a possible downgrade.

On the data front, US personal income came in stronger than expected with a +0.5 percent print versus 0.4 percent expected and 0.1 percent last time but spending slid back to flat from +0.1 percent (unchanged expected) suggesting the US consumer is still not that confident about the economy and more willing to save for a rainy day. The Fed’s favourite measure of inflation edged marginally higher in December with the PCE deflator up 2.4 percent y/y (2.3 percent expected while core readings were up 0.2 percent m/m and 1.8 percent y/y. The Dallas Fed manufacturing activity index showed an astounding surge to 15.3 from a revised -0.3 the previous month with new orders up at a 6 month high – merely inventory rebuild?

It is the final day of the first month of the year so watch out for possible exaggerated FX moves on portfolio re-hedging.