FOREX: Dollar Gains Amid Anxiety Ahead Of EU Summit Outcome

By Ilya Spivak, Currency Strategist

Talking Points

• US Dollar Gains Amid Anxiety Ahead of EU Leaders’ Summit Outcome
• Greece Under Pressure to Deliver on Troika Demands to Release Aid
• Eurozone May Speed Up ESM Funding by 1 Year, News Reports Suggest
• ISDA Decision on CACs in Greek PSI Bond Swap May Trigger Default

The US Dollar advanced against its major counterparts in overnight trade despite a pickup across Asian stock exchanges, which would typically be expected to weigh on demand for the go-to safe haven currency. The Japanese Yen fell after BOJ Governor Maasaki Shirakawa said the bank will maintain easing measures until its inflation goal of 1 percent is achieved. The MSCI Asia Pacific regional benchmark equity index added 0.4 percent, following Wall Street higher. North American shares seemed to overlook a lower than expected ISM Manufacturing reading and mixed results from Personal Income and Spending figures to focus on weekly Jobless Claims data. Initial and continuing claims fell to the lowest in 8 and 7.5 years, respectively.

Meanwhile, FX markets looked ahead, with all eyes on the outcome of the EU leaders’ summit concluding today in Brussels. The focus here is on the mechanics of implementing the second Greek bailout agreement , with Athens scrambling to complete a long checklist of requirements by the meeting’s conclusion to secure the first tranche of funding. Although EU policymakers have allowed Greece to miss ample deadlines before, the downgrade in credit market risk following the second 3-year ECB LTRO this week means their tolerance has likely been diminished . This opens the door for a testy outing , with the potential for a delay in the release of the first bit of aid threatening to put the Euro on the defensive .

With that in mind, initial news-flow from the sit-down has been generally supportive. Policymakers have reportedly agreed to speed up capital contributions to the permanent ESM bailout fund designed to replace the temporary EFSF now in place. While a final decision is still pending, initial reports hint Eurozone governments may make the first two annual installments into the find this year with the aim of having it at full capitalization of €500 billion in 2015. That would be one year ahead of schedule. The leaders of the currency bloc are also expected to sign off on the so-called “fiscal compact” hashed out in late January , clearing the way for it to be approved by national parliaments and in the case of Ireland, a referendum.

Another piece of the puzzle is likely to be another ruling from the International Swaps & Derivatives Association (ISDA) on the collective action clauses (CACs) written into the terms of the Greek PSI bond swap. ISDA announced earlier today that the ECB’s absence from the bond swap did not constitute a “credit event” that would trigger CDS redemptions. The key question now is whether that remains the case if participation in the exchange falls short of the expected 75 percent. The CACs would compel rebellious debt holders into the program, meaning the bond swap was no longer voluntary and thus making it hard for ISDA not to call it a default. While that is hardly the threat it was before ECB LTRO efforts built a firm firewall around EU banks, at least some reflexive Euro selling appears likely as a knee-jerk reaction in such a scenario.

Asia Session : What Happened

GMT	CCY	EVENT	ACT	EXP	PREV
23:30	JPY	Job-To-Applicant Ratio (JAN)	0.73	0.72	0.71
23:30	JPY	Household Spending (YoY) (JAN)	-2.3%	-0.9%	0.5%
23:30	JPY	Jobless Rate (JAN)	4.6%	4.5%	4.5% (R+)
23:30	JPY	Tokyo CPI (YoY) (FEB)	-0.2%	-0.2%	-0.2% (R+)
23:30	JPY	Tokyo CPI Ex Food (JAN) (FEB)	-0.3%	-	-0.4%
23:30	JPY	Tokyo CPI Ex-Fresh Food (YoY) (FEB)	-1.1%	-1.1%	-1.1%
23:30	JPY	National CPI (YoY) (JAN)	0.1%	-0.1%	-0.2%
23:30	JPY	National CPI Ex Food (JAN)	-0.2%	-	-0.1%
23:30	JPY	National CPI Ex-Fresh Food (YoY) (JAN)	-1.1%	-0.9%	-1.1%
23:50	JPY	Monetary Base (YoY) (JAN)	11.3%	-	15.0%
0:00	NZD	ANZ Commodity Price (FEB)	0.0%	-	1.1% (R-)

E uro Session: What to Expect

GMT	CCY	EVENT	EXP	PREV	IMPACT
7:00	EUR	German Retail Sales (MoM) (JAN)	0.5%	0.1%	Medium
7:00	EUR	German Retail Sales (YoY) (JAN)	0.2%	-0.9%	Medium
9:30	GBP	PMI Construction (FEB)	51.3	51.4	Medium
10:00	EUR	Euro-Zone PPI (MoM) (JAN)	0.5%	-0.2%	Medium
10:00	EUR	Euro-Zone PPI (YoY) (JAN)	3.6%	4.3%	Medium
10:00	EUR	Italian Deficit to GDP (2011)	4.0%	4.6%	Low
10:00	EUR	Italian Annual GDP (2011)	0.3%	1.5%	Low

Critical Levels

CCY	SUPPORT	RESISTANCE
EURUSD	1.3167	1.3351
GBPUSD	1.5865	1.5989

--- Written by Ilya Spivak, Currency Strategist for Dailyfx.com

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Original Article: http://www.dailyfx.com/forex/fundamental/daily_briefing/session_briefing/euro_open/2012/03/02/FOREX_Dollar_Gains_Amid_Anxiety_Ahead_of_EU_Summit_Outcome.html