Greek PM and Finance Minister calm markets with debt swap offer.
Oil higher as energy companies announce production cuts and lower revenues.
USD lower across the board after soft economic indicators.
RBNZ Governor says rates to stay on hold unless CB forced to cut.
The USD continues to struggle after last week’s lower than expected fourth quarter gross domestic product (GDP) figure. Softer data out of the U.S. combined with an optimistic outcome from Greek debt negotiations to push the EUR/USD higher. Newly elected Prime Minister Alexis Tsipras has begun a goodwill diplomatic tour to balance campaign promises at home with stern European expectations. Tsipras and newly appointed Finance Minister Yanis Varoufakis continue to be defiant seeking renegotiation, but have offered an olive branch in the form of a debt swap offer. Commodities have benefited from the drop in the USD as energy and base metals have surged erasing most to the losses of 2015.
Greece is seeking to renegotiate its EUR 320 billion bailout program. After winning elections last month with a strong anti-austerity platform Greek PM Tsipras rubbed Greek debt holders the wrong way but his Finance Minister while still not backing down from their goal have offered a novel alternative. Instead of the debt haircut market watchers were expecting Varoufakis has prosed a debt swap: existing loans to be exchanged with growth linked funds. This deal would avoid the need for immediate losses for holders of Greek debt, but is will have to be based on the trust that the incoming government can really follow through on its promise to end corruption and monopolistic practices while at the same time undoing some of the austerity measures put in place to repay existing debt.
The European Central Bank (ECB) has ruled out writing off any part of Greece’s debt. The same statement has been uttered by heads of state that sympathetic with Greece still expect the country to honour the agreement that bailed out the country in time of need. Germany as the biggest bond holder would have to agree to a deal, which at this point looks unlikely but just the fact that the offer does not include a haircut gives it a chance and the market is hopeful on the development. Greek negotiators are playing hardball as they know the euro zone is not worried about the monetary figures of a default or a renegotiation but of the precedent it will set for other bailout recipients.
The ECB issued an ultimatum of sorts as payments have continue flowing in, to avoid cutting off Greek banks access to liquidity. The estimated outflows from the financial system have been around EUR 11 billion after the election results. The local stock market has bounced back from losses, but its hard to see depositors going back to institutions that are caught in an international tug of war. Rebuilding the trust of the Greek people in the economy should also be high on the list of the Tsipras agenda as there will be no growth unless he manages it.
Oil prices surged on Tuesday as producers announced spending cuts along with comments from the OPEC Secretary General Abdalla Salem el-Badri that price of crude has hit bottom helping to drive the commodity higher. Brent and West Texas crude have seen gains of around 3 percent in morning trade and have climbed around 16 percent since Friday. British Petroleum announced a slew of spending and job cuts as the result of fourth quarter results. The BP CEO has commented that the excess supply driving oil prices lower will work its way out of the market, but it may take some time. OPEC’s el-Badri was more optimistic and he is forecasting a $200 per barrel price in the future.
Gold prices are lower after a lack of fundamental developments have decreased the appetite for the metal as a safe haven. The the Greek debt situation which had powered the yellow metal gains has cooled down but the outcome of the ongoing negotiations still has potential to spark a new rally. Global central bank intervention as the Reserve Bank of Australia announced interest rate cut are also keeping gold’s demand low as inflation expectations are weak and more monetary stimulus is expected from China, Japan and Europe.
Reserve Bank of New Zealand Governor Graeme Wheeler said that he expected to keep official interest rates steady for some time yesterday. The Governor then added that only if the economy needs it from internal or external factors will that outlook change in the short term: “A period of stability is the most prudent option”. Wheeler repeated that the New Zealand dollar remained “unjustified and unsustainable” despite recent falls and he expects further depreciation. Central bankers continue to make verbal interventions as they seek to lower the price of their currency to gain a competitive edge and boost growth. The biggest caveat is that for this strategy to work there must only be a few nations applying it, and now it seems that it is a true race for the bottom as the past stigma of currency devaluation has lost its bite.
The USD has stumbled all week long and the market is looking forward to the Non farm payrolls (NFP) report on Friday. The biggest forex market indicator acts as a reading of U.S. economic health and comes at a time where there is growing doubts about its pace. The Federal Reserve has the luxury of patience as other central banks have created a rate divergence expectation with the American central bank the first one of the majors to break the accommodative monetary cycle. The ADP private payroll figures will shed some light on the state of American employment today. While not heavily correlated with the NFP a good private number can help the USD get some traction ahead of the headline employment report at the end of the week.
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