EURUSD Relatively Subdued
14/04/10 08:59
We still like Short JPY against High Yielders -
Pullback welcome!
EURUSD has been relatively subdued following the announcement of the terms of the proposed aid package to Greece as investors still remain uncertain whether or if Greece will choose to ask for aid. Highlight a note by UBS European fixed income team in which they describe potential deficit effects of the EMU/IMF plan. Should the current plan be utilized, investors could remain wary on the euro as the plan could pressure other high deficit member nations.
The proposed package is larger than was initially envisaged by many market participants, though the rate of around 5% for the EMU portion of the loans does not appear particularly advantageous for Greece from the point of view of longer term fiscal sustainability. Reports suggest that the plan in its current format will use the capital weightings of Euro area governments at the ECB as a guideline for the individual states' contributions to the €30bn Eurozone component of the package.
EURUSD has been relatively subdued following the announcement of the terms of the proposed aid package to Greece as investors still remain uncertain whether or if Greece will choose to ask for aid. Highlight a note by UBS European fixed income team in which they describe potential deficit effects of the EMU/IMF plan. Should the current plan be utilized, investors could remain wary on the euro as the plan could pressure other high deficit member nations.
The proposed package is larger than was initially envisaged by many market participants, though the rate of around 5% for the EMU portion of the loans does not appear particularly advantageous for Greece from the point of view of longer term fiscal sustainability. Reports suggest that the plan in its current format will use the capital weightings of Euro area governments at the ECB as a guideline for the individual states' contributions to the €30bn Eurozone component of the package.
There are several outstanding questions on the aid package as well as assigning a probability of Greece asking for aid. But nevertheless, investors should look to see what effect any EMU aid will have on other member nations, particularly as several have seen their sovereign 5y CDS spreads widen over the past month. Any further increasing scrutiny of other countries will keep the euro under pressure as the fiscal problems will not be fixed overnight. We look to sell on EUR rallies.
According to a newspaper report the BoJ may consider upgrading its CPI forecast for the fiscal year beginning in March 2011 to 0%, with a decision due on April 30. This would mark a significant turnaround in expectations given that, only 3 months ago, both the MoF and the BoJ appeared to have resigned themselves to 2-3 years of deflation ahead. Although the yen appreciated on the back of these news, draft comments from Japan's ruling party about keeping USDJPY at a higher level kept the currency capped. BoJ Governor Shirakawa added the bank will patiently continue efforts to pull Japan out of deflation. Shirakawa appears to be in no hurry to ease policy further and he again insisted that no policy option should be ruled out. Officials continue to uge the JPY weaker. The current risk environment supports long audjpy, cadjpy and nzdjpy.
Source: UBS, Bloomberg,
Chris Lori, CTA