DailyFX | January 23 2012 9:28 EST
After weeks of negotiations and worries that a deal would not be reached over the weekend, the Greek debt swap talks have moved in a favorable direction, providing the additional firepower higher yielding currencies and risk-correlated assets needed to open the last full week of January higher.
• EU Banks May Deepen Dependence on ECB – Bloomberg
• Spain Risks Deficit Spiral as Poll Postpones Cuts – Bloomberg
• EU Bans Iranian Oil, Tehran Responds with Threats – Reuters
• Euro Rebounds to Trade above $1.30 – WSJ
• Lagarde Says Europe Must Boost Firewall – WSJ
European Session Summary
Although trading in the early part of the Asian session yielded little volatility and price action mostly to the downside across higher beta currencies, such as the Australian and New Zealand Dollars, once again, it was the European session that warrants a discussion. Higher yielding currencies and risk-correlated assets exploded higher shortly before 11:00 GMT, as news leaked that the Institute for International Finance (IIF) and Greek officials moved closer towards a debt swap deal. While nothing was official at the time this report was written, European Union Economic and Monetary Affairs Commissioner Ollie Rehn said the Greek negotiations should conclude “shortly.”
Taking a look across other asset classes, the move higher in risk appears to be confirmed across the board, not just in currencies and equities. All of the PIIGS’ (Portugal, Italy, Ireland, Greece, and Spain) 10-year bonds had strengthened on the day (higher price, lower yield), while the core countries saw their debt erode slightly. Ahead of trading in North America, U.S. Treasuries showed weakness on the long-end of the curve, with the 10-year Note holding firmly above the psychologically significant 2.00 percent yield.
It is worth noting that the current rally has some credence in my eyes, given how funding rates have eased substantially over the past few weeks. As noted in this report numerous times over the past few months, the Euribor-LOIS 3-month rate, the rate at which Euro-zone banks lend to one another on an unsecured basis, has fallen substantially, to its lowest level since the late-October Euro-zone summit. Clearly, this is an indication that the European Central Bank’s December long-term refinancing operation (LTRO) has provided the necessary support to keep liquidity flowing in the Europe. We will continue to monitor this rate as another spike higher would suggest strains are starting to reemerge, and the ECB’s LTRO provided a slight pause in the crisis, nothing more.
EUR/USD 5-min Chart: January 20 to January 23, 2012
Charts created using Market Scope– Prepared by Christopher Vecchio
Overall, the big development, in my opinion, is that the Euro traded back above the key psychological 1.3000 level against the U.S. Dollar, as the world reserve currency’s dismal performance to start the New Year continued. In hand with the Euro’s strength was strength by the Swiss Franc, which given the EUR/CHF currency floor at 1.2000, has moved in near-lockstep with the Euro. In fact, since September 6, the day the EUR/CHF floor was implemented by the Swiss National Bank, the EUR/USD and USD/CHF have a significant -0.903 correlation. As the SNB is forced to intervene further in the future, I would expect this correlation to tighten: when the EUR/USD strengthens, the USD/CHF will weaken; and vice-versa.
24-Hour Price Action
Key Levels: 13:45 GMT
Thus far, on Monday, the Dow Jones FXCM Dollar Index is higher, trading at 9851.14, at the time this report was written, after opening at 9884.24. The index has traded mostly lower, with the high at 9905.49 and the low at 9841.63.
--- Written by Christopher Vecchio, Currency Analyst
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