The FXDD Morning Review

The long awaited Greece bailout agreement (not yet fully approved however), includes 130 billion euro of aid to Greece. In addition the Private Sector Investors agreement is for a 53.5% “haircut” on bonds. This was higher than the original 50% proposed in October but was needed in order to help bring what is a somewhat questionable 2020 debt to GDP projection to 120.3%. Greece cannot balance a 3 month budget. To expect a 2020 budget to be some value seems a bit of a reach.  In any case the target is needed to appease the IMF officials who otherwise might not participate in 130 billion bailout (fit the numbers to get the results).  There is one caveat, the Private Sector Bond holders have to agree on the new proposed haircut(i.e., bond swap) that will more than half the value of the bonds they own.   This process will be started immediately as Greece needs the approval of 100% of the bond holders (200 billion of debt) before the next key bond maturing date on March 20th.  If the don’t agree they will be forced to agree via Greece’s use of a Collective Action Clause (this would result in a default by the credit agencies. This is what is trying to be avoided).  Under the agreement, bond holders will receive 31% of their current bond holdings in the form of new bonds with maturities of 11 and 30 years and 15% in short term paper issued by the EFSF.  It seems negotiations on a PSI are more of an edict which may be a good thing.  In another cost cutting measure, the ECB will not participate in the PSI haircut but will funnel all profits from their holding of Greek bonds back to Greece.  So should Greece continue to pay interest (partly from the bailout) and mature bonds, the profits (interest gains) would be sent back to Greece. In effect Greece does not have an interest rate obligation on the 57 billion euro bonds that the ECB holds.  The interest rate on the first loan to Greece has also been reduced which was needed in order to balance the books as well.  The news sent the EURUSD on a reactionary move to the upside (high of 1.3292). The 100 day MA at the 1.3308 level seemed to have attracted the sellers and the pair is now down on the day.  In other news form Europe the Consumer confidence in the EU is expected to rise slightly but still remains negative at -20.1 vs -20.7 last month (to be released at 10 AM ET) . The low point going back to August 2009 was -21.3 in December so the improvement is off of a low level and not all that strong. In Switzerland, they announce their January Trade Balance of 1.55 billion CHF. This was worse than the 2.5B expected and was hurt by  a 3.4% decline in exports.   The USDCHF and ERUCHF have rallied off the news today.  The UK reported that Public Sector Net Borrowing declined by a larger than expected 10.7 billion (vs. -9.1B). January is a big tax collection month but it is indicative of improvement in the UK fiscal position.  The GBPUSD fell to the 100 hour MA in UK trading but found support buyers against the level (at the 1.5787 level currently). In economic data today, the US has Chicago Fed Activity index at 8:30 AM with expectations of 0.22 vs 0.17 last month.  In Canada Retail Sales -0.2 and +0.1 for the headline and the ex auto respectively will be released at 8:30 AM ET. Wholesale Sales will also be released at 8:30 AM ET with the expectations of a 0.6%.