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By the end of Tuesday's meeting, a sense of growing optimism and solidarity around Greece was growing, with various officials providing headline quotes to massage sentiment. The EU's Rehn confirmed what many in the market had speculated, stating that the Eurogroup had sketched out an aid strategy to Greece.
In addition, slightly more concrete evidence of an improving situation in Europe was the S&P announcement that Greece's BBB+ credit rating was affirmed, and furthermore, that it would be removed from Credit Watch Negative - though it still retains its negative outlook. This is surprising to us, since the ratings agency only downgraded Greece a few weeks ago. The EURUSD responded as expected by rallying strongly, and when the smoke cleared the pair had rallied to a 1.3818 high - breaching the long term downtrend in the process.
However, we are sticking to our central tenet that the Euro bloc policy makers would drag their feet as long as possible in the hope that markets would "normalise"; and would avoid contradicting the original tone of the Maastricht Treaty. Barring any official commitment on aid, we believe the EUR will continue to be sold on rallies; especially given the uncertainty over whether Greece will be able to re-finance its debt in the Spring.
Turn in Greece sentiment
In line with our theory, the EUR and GBP's rally was halted dead in its tracks after Greek officials (some reports named, others anonymous) stated that they were not hopeful that a solid aid proposal would be reached at the March 25-26th EU summit and they were prepared to go to the IMF.
To make matters worse, the source said that the bad feelings between Greece and Germany had increased, making negotiations difficult. Greek Deputy PM Sachinidis said later that the lack of support for Greece by EU leaders would have significant consequences for the EUR. These words clearly provided a reality check to the markets that the situation in Greece is far from being resolved (despite continued EU bailout grandstanding).
Elsewhere, EU Commission President Durão Barroso said the design of a bailout mechanism for Greece is being developed. And in response to comments from Germany's Finance Minister Schaeuble and Chancellor Merkel that a member state could be forced out, Greek Prime Minister Papandreou adamantly stated that there was no chance Greece would leave the Eurozone. While the IMF has a wealth of experience and expertise, the stigma and unanswered questions would clearly be a EUR negative.
By Friday, all the optimism surrounding Brussels had disappeared as Greek PM Papandreou stated that he needs an answer regarding potential aid strategies at the 25-26th EU leader summit. And in a not-so-subtle shift, Germany is now openly supporting Greece turning to the IMF, as it would be unconstitutional for any EU member nation to provide financial aid. Clearly, the rift between Greece and Germany is growing and now spilling out into the public forum making the difficult task of finding a solution even thornier.
BoJ keeps rates unchanged, China dominates currency talks
In, Asia the Bank of Japan voted unanimously to keep its policy rate unchanged at 0.1% but in a 5-2 vote; doubling the short term fixed-rate lending facility to Y20 trillion. The move had been widely publicised and the JPY gained slightly, as the market had expected a more aggressive form of Quantative Easing. In China, things are heating up around the USD - CNY relations with around 130 members of Congress signing a letter expressing 'serious concerns about China's manipulation of its currency'.
With the US Treasury Department delivering its biannual report to Congress in April, we expect things to heat up further. On a final note, Prime Minister Wen Jiabao threw cold water on last week's CNY appreciation exuberance. Wen Jiabao said that the CNY wasn't undervalued and rejected other nations' unwarranted political pressure.
Further CHF appreciation expected
In Switzerland, the newly-minted SNB's Board member Jean-Pierre Danthine used his first official policy speech to completely pull the rug from under the EURCHF. He stated that currency policy couldn't be supported indefinitely and people must get acclimatised to market-defined FX-rates and higher interest rates.
The market immediately took this as an indication that the SNB was lessening its FX interventionist policy and EURCHF maliciously traded down to 1.4400, paused for breath, and dove to 1.4355. Danthine later backtracked, saying the SNB stood ready to intervene on excessive CHF strength and would maintain its ultra loose expansionary policy. However, the damage was already done. With growth looking to exceed original forecasts and inflation probably staying above a SNB concerning threshold, we forecast further appreciation in the CHF.
Staff
