Markets Shrug off S&P’s Downgrade of Greece ahead of LTRO

BBH CurrencyView

The US dollar is broadly weaker ahead of tomorrow’s 3-year ECB tender (LTRO). The euro has largely shrugged news that S&P cut Greece’s rating to selective default with markets instead focusing on the decline in oil prices and the potential for a large uptake at tomorrow’s LTRO. The dollar is a tad weaker against the yen (down 0.1%), with the dollar falling against the yen for the second consecutive day. The move has prompted concern from Japan’s finance minister Azumi, saying that he will take action against speculative yen moves. EUR/JPY is trading just ahead of the 200dma (107.05). Meanwhile, Japanese retail sales surged in January driven by rising car sales due in large part to the eco-car subsidy. Car sales were, in fact, up 24% y/y, with retail sales climbing 1.9% y/y (vs. -0.1% expected). The Australian dollar is flat after reaching a 1-week high of 1.078. Global stocks are mostly higher, with EuroStoxx 600 up 0.1%, though bank shares are flat. The MSCI Asia Pacific index is currently up 0.8%.

There have been several developments today that while not having much impact on prices are still noteworthy. The German Constitutional Court has ruled that the budget committee set up to expedite parliamentary approval is limited in scope to decide only secondary market bond purchases by the EFSF. The committee is not a sufficient mechanism for other EMU aid issues. The decision can only be seen as the third blow to Merkel in the past several days. She was forced by her own coalition partner to select Gauck as president. Merkel failed to carry the majority of her coalition in yesterday’s vote on Greek 2.0. And now this constitutional setback that can only slow the process further. Another procedural development has been the ECB’s decision not to accept Greek government bonds as collateral for the LTRO tomorrow. This adds a new wrinkle into estimate the take down of the LTRO. There is another procedural development that may have substantive impact. The determination committee of ISDA is to meet around 17:00 GMT, posing headline risks.

There have been several substantive developments as well. First, it appears that German inflation is stickier than expected as the preliminary state reports suggest a 2.3% pace rather than 2.1%., which is what was expected and also was the January print. Second, Italy’s run of well received bond auctions continues. Today it raised about 6.25 bln euro in 5 and 10-year paper, the latter being a new benchmark. The auctions for these tenors resulted in the lowest yields since May and August 2011 respectively. There was follow through in the secondary market. Third, in contrast, Spanish bonds are under pressure following the Spanish finance minister admission that the deficit blow out last year was more than initially claimed. Last year’s deficit was 8.5% of GDP, up from initial estimates of 8.2% and the 6% target. Fourth, French Socialist presidential candidate Hollande has been pressing his case harder, calling for a 75% income tax on top earners and insisting on renegotiating the fiscal compact. Sarkozy has been unable to capitalize as appears to backtrack from promise to put the issue before a public referendum.

The Swedish krona is among one of the best performing currencies in the G10 this morning driven in part by strong domestic data and favorable risk appetite. On the data front, retail sales unexpectedly gained in January and beat consensus expectations by increasing 0.1% vs. 0.0% m/m. The sales were powered by strong exports and surge in household confidence following the Riksbank move to ease policy at the February 16 meeting. At the same time, the Krona is also benefitting from the improved financial conditions in the euro zone ahead of tomorrow’s LTRO announcement. Indeed, while the SEK has recently lagged behind NOK as a result of the Riksbank’s rate cut and higher oil prices, it seems many of the negatives that have been weighing on the SEK have been fully priced in at this juncture as economic data is expected to stabilize amid the improvement in euro zone data, Germany in particular. In the near-term we see support for EUR/SEK at 8.82, with resistance at 8.820.

Hungary central bank holds its policy meeting at 8am NY time, with rates expected to be kept steady at 7.0%. If it were not for the currency risks, the central bank would likely be on an easing path already. Economic numbers have come in mixed in recent weeks, but are expected to worsen substantially this year given the declining confidence in the economy and likely credit contraction by banks. However, inflation and wage data is coming in way too high to warrant easing near-term. But even more concerning, core inflation jumped to 4.9% y/y in January. Positive sentiment towards HUF has continued on supportive comments by Orban and other senior government officials about getting an agreement with the IMF, but we do not think it is enough to change the central bank’s cautious stance. In the near term, however, we think that EUR/HUF based around 286 this month, which coincides with the 62% retracement level of the July-January rise, and we see levels near 290 as a good area to establish new medium-term HUF shorts.