Exchange Rates Today: Euro boosted by Chinese surprise, US dollar scrambles higher vs Yen, promising developments on dealing with Greece

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Category: US Dollar Exchange Rate

Published on Monday, 20 February 2012 09:39

Written by Rob Samson

Exchange rates are today reacting to China’s unexpected weekend decision to cut the reserve ratio requirement by 50 bp boosted risk appetite throughout the Asia session.

The euro has been sent higher alongside commodities and equities. The US dollar is broadly lower.

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"The effect was magnified by the element of surprise. USDJPY scrambled higher to 79.89 but the rally was cut short when the Japanese trade deficit for January came in smaller than expected. Although China’s stimulus measure in itself is limited in efficacy and comes amid ongoing signs of a slowdown in China, the PBoC’s joining of the ranks of major central banks adding to easing will help to further stabilise economic conditions," says Geoffrey Yu, exchange rate strategist at UBS.

Meanwhile expectations continue to build ahead of Monday’s meeting of Eurozone Finance Ministers and the outcome of the meeting is likely to be a defining moment for how risk appetite evolves throughout the week.

Germany’s Finance Minister Schaeuble suggested a decision would be made on the ‘whole program’ on Monday and he backed away from the idea of a piecemeal step-by-step approval process that could drag on for several weeks.

"That’s a promising development," says Yu.

However, Eurogroup Chair Juncker indicated that much negotiation is still needed if full agreement is to be reached by Monday night. The Financial Times reported that the Greek parliament is to vote this week on adding CAC clauses into existing Greek bond contracts.

According to Yu this is likely to be seen as a preparatory step towards an enforced compulsory restructuring should voluntary participation levels disappoint.

UBS say the move also raises the risk that Greece will be downgraded again given S&P has already announced that if legislation is passed to insert such clauses then “we would lower the issue ratings on debt issues concerned to 'D' from 'CC'”.

In addition, any subsequent invocation of these CAC clauses would very likely cause CDS contracts to be triggered, although the decision on this point will rest with ISDA.

In a further sign of progress towards a second rescue package for Greece, a Greek official announced that the debt swap for private investors would be launched by March 8, with the aim of concluding the transaction three days later.