by Dean Popplewell
In this market, one should not put too much faith on a deal being signed, sealed and enjoyed by investors, despite knowing that anything is possible; look at Berlusconi! G20 came and went this past weekend. There were no surprises, no magic potions, and no magic plans concocted for Europe. Member finance ministers told the Euro-zone that it would need to strengthen further its permanent and temporary EFSF/ESM firewall programs before any of the members can commit to expanded funding for the IMF for use in Europe. Greek event risk obviously dominates their reasoning.
Greece still needs to pass 38 demands by the troika by Wednesday and there is that little problem of a bond swap uptake. The haircut for private bondholders requires +66% of volunteers. Will they be found when they get only +26-cents on the dollar? These reasons alone have the EUR bear baffled why the single currency has managed to recover just shy of 1.35 in the aftermath of a questionable Greek deal and no G20 support. However, it seems in the late Euro shift this morning, price action may be turning over with the market beginning to experience some negative EUR movement. Is the market finally waking up and realizing that the primary event this week can be EUR negative?
The ECB will conduct its second 3-year Long Term Repo Operation (LTRO) on Wednesday, the same day as the last of the troika demands. So far, the market consensus is for an allocation holding around +EU470b. Market thinking has a sub-EU200b uptake to ‘generate a significant hit to risk sentiment and peripheral sovereign debt.’ In contrast, a result above +EU500b would likely result in a near-term strong risk rally and reinforce recent gains in risk sensitive currencies. That is fine in theory, but, how long is the risk rally to survive?
However, with a large allocation uptake, the single currency potentially has more to lose. Obviously, a larger number will create that initial knee jerk euphoric move, however, once investors realize that this excess liquidity is likely to depress Euro front-end rates further, it should keep the EUR vulnerable outright and against the crosses. Again, this is where FX traders require their FI hats. Also, one will have to question why Euro-banks are so enthusiastic for funding. What about the link between banks and the sovereigns?
It seems that fast money again is looking to trigger the weak EUR long stops below 1.34 ahead of the North American Open. Earlier it was Easter Europe and the Middle-East who happened to lean on the single currency. The eventual German approval for the Greek package should support the currency, but how long can ‘one’ bear the burden of sole support?
