The currency blog

Yesterdays appealing comments by Fed Chairman Bernanke, in addition to better than expected results for German IFO business confidence last month, have boosted risk assets whilst weakening the Greenback against Sterling and the Euro. Markets appear to have shaken off, at least for now, growth worries stemming from weaker manufacturing confidence surveys in China and Europe last week. The S&P 500 climbed 1.4% to 1,416.51, its highest close since May 2008. The Dow Jones rose 1.2%, while the Nasdaq gained 1.8% to close at 3,122.57, its best finish since November 2000.

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The Euro suffered again overnight as reports in various papers talking up the possibility of Greece badly missing their deficit targets. The news has caused another shift out of the Euro as investors have looked for safer places to invest their funds. The articles, if proven true, will add yet more pressure onto the rest of Europe with major doubts already surrounding the success of the latest bailout for Greece worsening.

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Following an indifferent Asia trading session overnight where Japan kept interest rates at 0.1%, the market now awaits key data from the Europe and the US to drive sentiment for the rest of the week.

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Another expectation beating employment report from the US on Friday has the markets in buoyant mood this morning. The headline number was 227K jobs created in February against a forecast of 210K, with strong upward revisions to both December and January numbers. This marks the third straight month of strong jobs growth with gains spread across different sectors of the economy. One negative was that construction jobs showed flat growth for the first time in a couple of months. Interestingly we have again seen the Dollar strengthen on the back of positive US developments, which flies in the face of the risk-on, risk-off paradigm that has dominated FX trading in the US Dollar over the last few years. Commodity currencies initially surged on the news but have cooled off as we start the week.

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EU officials are desperately trying to convince private holders of Greek bonds to accept a crucial debt swap deal ahead of today’s deadline. In order for Greece to receive a second bailout it will need at least two thirds of bondholders to take a 53.5% cut in the value of their holdings and the deal is considered essential in Greece’s attempt to avoid a default. According to the Institute of Finance yesterday just under 40% of the bond holders had agreed to the new deal leading to a nervy countdown at 8pm GMT deadline later today. If the total number of bond holders reach the required 66% (approx €150bn) agree to the swap, the government can force the other bond holders to take the haircut too. Remarkably the Euro remains relatively resilient in the face a Greek default up slightly against the Greenback reaching 1.3217.

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Greek Politicians are applying increasing amounts of pressure to bond holders in a last ditch attempt to obtain the necessary 75 per cent to agree to the terms of the looming bond swap tomorrow.  The Hellenic Republic is threatening to invoke Collective Action Clauses (CACs), agreed by Greek politicians last month, to force through the deal which if used would almost certainly constitute the first sovereign default in Eurozone history. Any default would trigger credit default swaps on the bonds, a type of insurance that could lead to be very lucrative to those investors refusing to participate in the deal but might also lead to renewed uncertainty in the market. CDS contracts are traded over the counter and are fairly opaque in nature and it is unclear exactly how many contracts might be triggered and who might be on the other (losing) side of the bet. The uncertainty is naturally translating into risk-off, with equity markets declining along with the Risk-on currencies such as the Euro and Sterling. The US is once again the big winner, rising across the board over the last few days on a run that can be expected to continue until full details of the bond swap are announced.

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