Not Groundhog Day in FX, but..

North American players sold into yesterday's Europe-led euro rally and today European operators drove the euro back above the $1.28 level and managed to take out yesterday's highs to reach almost $1.2850 near pixel time.   The ostensible driver were reports that the IMF is considering boosting its resources with $1 trillion cited as a possibility.  With Europe still struggling to boost the capacity of the EFSF/ESM and all the more pressing given the EFSF loss of its triple A rating by S&P, more resources at the IMF is one way the potential funding cap can close.  

Currency in Crisis



We correctly anticipated yesterday's euro decline, but today may prove a bit trickier.  The euro has scope now to test the $1.2875-$1.2900, before coming back off.    Note that the euro has not closed above its 20-day moving average against the dollar since Oct 31.  It comes in today near $1.2875.  The $1.29 area corresponds to a 61.8% retracement of the euro's losses since Jan 4.

The key issue is whether North American players will sell into the euro bounce as they did yesterday, frustrating the euro bottom pickers, especially on the crosses.

The 14.5 bln euros that Greece needs to repay on March 20 is increasingly becoming an important date for market participants.  Fitch yesterday warned Greece was going to default on the payment.  Yesterday's comment from a hedge fund manager, partly involved with the the negotiations with Greece suggested that a deal would be worked out (PSI), and seemed to suggest that the March 20 payment could be included in the agreement. Many participants are understandably concerned.  There is talk of very good demand for $1.10 euro puts that would cover that period. 

The PSI talks resume today and one of the most effective incentives to induce the private sector participation to to make an agreement the least bad scenario.  Brinkmanship tactics may be effective for negotiators but it is difficult for market participants.  

While other currencies are advancing against the dollar, the euro is leading the majors.  Sterling is lagging a bit and the jobs data was not particularly helpful, although the claimant count did not rise as much as expected.  The disappointment was with the ILO figures, showing a large rise in unemployment and 8.4% unemployment rate, the highest since 1996.  Sterling could not rise above yesterday's high and that $1.54 area seems likely to hold today.  

Portugal's bill auction, which included an 11-month bill went off without a hitch and bid-covers are still quite favorable though not as much as previously.  That said, the auction continues the streak of rather constructive results at the start of the year for European sovereigns raising funds.  As we have noted, the maturing funds and coupon payments roughly offset the anticipated new issuance in January before favoring new issuance next month.  

Turning to emerging market, the currencies are generally bid against the dollar.  The most noteworthy development today is in Indonesia.  Moody's upgraded the sovereign rating to Baa3 with a stable outlook. This is the first investment grade rating since the Asian financial crisis.  Separately, and earlier, the central bank of Indonesia left rates unchanged, but changed the rate corridor, which effectively eased the effective policy rate by 50 bp to 4%.  This could lead to a rate cut next month.  The dollar fell to its lowest level of the against the rupiah since just before Xmas.