Markets uncertain over Greek debt swap as China's growth questioned

Tom Tong06/Mar/2012Currency Updates

EUR

The Euro managed to record gains versus the Greenback despite lingering uncertainty about the private participation in the Greek debt swap along with soft economic data. Markets were also uncertain on the back of China reducing their GDP target to 7.5%, the first time it has dipped below 8% since 2004. European Final Services PMI came out at 48.8 compared to an expectation of 49.5, signifying a contraction (although there were sharp differences between the core and periphery countries). Sentix Investor Confidence also came out worse than expected at -8.2, which is a measure of investor confidence in the Eurozone. However, Eurozone retail sales did surprise to the upside showing an expansion of 0.3%. Furthermore, Germany pledged to resume talks on increasing the scope of the European Stability Mechanism, pushing the Euro further.

Data coming out yesterday from the Commodity Futures Trading Commission also showed that speculators had reduced their short positions on the euro again in the week up to February 28th.

However, there were signs that the second Long Term Refinancing Operation may not be having the desired effect as overnight deposits at the European Central Bank surged to a record-high of EUR 820.8B, showing that banks were looking to keep the liquidity in safety rather than increase lending to Eurozone companies as desired by the ECB. As a result, ahead of the ECB interest rate decision on tap for later this week, dovish comments coming out of the central bank could sink the single currency as market participants see the central bank pushing the benchmark interest rate below 1.00% over the coming months.

GBP

Sterling edged up after hitting a 10-day low against the dollar on Monday, but it remained vulnerable along with other riskier currencies due to uncertainty about Greece’s progress in completing a debt restructuring deal.

Traders said some profit-taking on dollar gains helped lift the pound off its lows, though wariness before a deadline on Thursday for Greece to complete a bond exchange with private creditors could put sterling under more pressure in the coming days. A below-forecast UK services sector survey weighed on the pound earlier in the day (coming in at 53.8) but its impact was limited as the data still suggested the UK economy was recovering and would probably avoid recession.

Analysts claim that whilst PMI was down from its January figure of 56, if the PMI continues to come out around the 54 mark then the risk of recession should be written off. Sterling was up 0.1 percent against the dollar recovering from lows not seen since Feb 28th. Recent UK data have helped support the pound against the euro, however, as it has dampened the prospect of further monetary easing by the Bank of England.

Finally, yesterday the British Chambers of Commerce, Britain’s largest business lobby group, revised down its forecast for growth in 2012 but said Britain will avoid recession this year and the BoE will not need to inject more stimulus.

USD

The dollar lost momentum on Monday, falling against the euro for the first time in three sessions, as profit takers moved in following mixed economic data from the US and Europe. In contrast, the US services sector expanded at a faster than expected rate in February. Reports revealed an upside surprise for the ISM index which should bode well for first-quarter GDP growth.

The index climbed to 57.3 from 56.8 in January, which signalled the fastest rate of expansion for a year.

Worries ahead of Greece completing a debt-restructuring deal kept the euro gains in check while the dollar’s decline was limited by China’s reduction in its annual growth rate to 7.5%, the lowest rate in eight years.

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Written by Tom Tong

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