Outlook For EUR Hinges On Greek Bond Swap

TODAY'S BIGGEST PERCENTAGE MOVERS

EUR/AUD		-95 pips	-0.76%
aud//usd		+75 pips	+0.70%
AUD/JPY		+52 pips	+0.60%

THE STORIES IN THE CURRENCY MARKET

• OUTLOOK FOR EUR HINGES ON GREEK BOND SWAP
• USD: OIL, OIL, OIL
• GBP: MANUFACTURING ACTIVITY GROWTH SLOWS
• CAD: CURRENT ACCOUNT DEFICIT NARROWS
• AUD: MANUFACTURING ACTIVITY CONTINUES TO EXPAND
• NZD: OIL AND GOLD PRICES UP
• JPY: HIGHER CAPITAL SPENDING

EXPECTATIONS FOR UPCOMING FED MEETINGS

** PERCENTAGES MAY NOT ADD UP TO 100% BECAUSE OF THE PROBABILITY OF LARGER OR SMALLER MOVES BEYOND THOSE SHOWN ON THIS TABLE

OUTLOOK FOR EUR HINGES ON GREEK BOND SWAP

The euro continued to weaken against the U.S. dollar as Wednesday's liquidity injection by the European Central Bank hangs over the currency. Over the past week there has been one consistent message from all official agencies involved with Greece and that is all decisions hinge upon the results of the Greek bond swap. In fact, the main reason why the EUR/USD consolidated today is because is investors know that there will be no additional progress for Greece until the bond swap results are in. The European Union made it clear in their meeting today that they will be holding off on finalizing their approval for a second Greek bailout package until after the bond swap window closes March 9^th. The IMF will wait to decide their contribution level when the results are out as well and this morning the International Swaps and Derivatives Association said that a credit event could still occur at a later date, which would be after the PSI. Everyone is waiting to see how many private sector bond holders voluntarily participate in the bond swap. If the swap falls short, Greece will most likely activate their collective action clauses and use legal means to force all qualifying bondholders to accept the haircut. At that time, the EUR/USD will fall and fall sharply because ISDA will be forced to re-review payout on Greek credit default swaps and if they do not authorize payments, they risk losing all credibility. However there is still a very small chance that the voluntary bond swap will be a success but the odds are very slim. Nonetheless, no one wants to take the steps that must follow a Greek default until they are absolutely sure that one has occurred and unfortunately legally requiring bond holders to accept a haircut changes the terms of the bonds and is the quintessential definition of what constitutes a default.

This morning, ISDA decided that no default insurance needs to be paid out on Greece, but this is in no way a final decision. Like the rest of Europe, they are kicking the can down the road by saying that "the situation is still evolving" and "a credit event could occur at a later date." Declaring a credit event would restore the credibility of credit default swaps but could also cause a large disruption in the markets. As a result, it is far smarter for ISDA to declare that a credit event has occurred after Greece changes the terms of the bonds because at that point, the decision will be a no brainer. In fact, the impact of their decision on the EUR/USD at the time could also be more limited as investors would immediately begin to price in a credit event once the CACs are activated. We don't have much going on in Europe over the next 24 hours. European Leaders will continue to meet but no major announcements are expected. According to this morning's U.S. economic reports, the manufacturing sector in the Eurozone contracted in February. Activity in Germany was revised slightly higher while activity in France was revised lower. German retail sales are due for release tomorrow along with Eurozone producer prices – a rebound is expected in both reports after dips the previous month. Better than expected GDP and PMI numbers from Switzerland failed to lend much support for the Swissie, which weakened against both the U.S. dollar and euro. We do not anticipate any significant volatility in the EUR/USD on Friday with the real test for the euro coming next week.

USD: OIL, OIL, OIL

The U.S. dollar ended the North American trading session lower against all of the major currencies with the exception of the euro and Swiss Franc. Early gains in the greenback evaporated slowly as risk appetite fueled gains in higher yielding currencies. The Canadian, Australian and New Zealand dollars performed particularly well thanks to the rise in commodity prices. The price of crude oil is up 2 percent today while the price of brent is up 3 percent and this is exactly what Fed Chairman Ben Bernanke is worried about. Central bank officials had not accounted for such a sharp the rise in oil in their forecasts. Since the beginning of the year, WTI Crude is up 10 percent and this has driven the average price of a gallon of gasoline in the U.S. up 12.8 percent. Tensions in the Middle Ease have increased over the past 24 hours with Israel warning that it could test fire a ballistic interceptor missile. The recent rally in oil prices will increase inflationary pressures around the world, making central banks less apt to loosen monetary policy even though higher prices hurt growth. This will pose a threat to growth in countries around the world and those that are actively implementing austerity measures will probably feel the most pain. Yesterday Fed Chairman Ben Bernanke made it clear the need for another round of QE has decreased because of higher inflation and improving conditions in the labor market. The latest jobless claims report gives them more to cheer about. Both weekly jobless claims and the less volatile four week moving average fell to their lowest level since March 2008. This confirms that the labor market is improving and hopefully this will translate into stronger job growth. At bare minimum, companies are laying off fewer workers which is positive for confidence and consumption. Unfortunately it may take some time before we see solid spending numbers. Personal spending rose a mere 0.2 percent in January, which was weaker than expected. Personal income growth slowed from 0.5 to 0.3 percent. Although Americans are still making more than they are spending, the pace of growth in wages and consumption remains slow. The manufacturing sector on the other hand continues to confuse us. The ISM manufacturing index fell from 54.1 to 52.4 in February. Prices paid rose sharply but the decline in manufacturing sector growth is inconsistent with the improvements seen in the regional indices. New orders and supplier deliveries were particularly weak but increased activity was seen in most of the other subcomponents. The U.S. may be a service based economy but manufacturing is still driving the recovery. Fed Chairman Ben Bernanke made it clear in his semi-annual testimony that as long as U.S. data continues to improve they do not need to resort to QE3.

GBP: MANUFACTURING ACTIVITY GROWTH SLOWS

The British pound strengthened against the U.S. dollar and euro despite mixed economic data. Growth in the manufacturing sector slowed in the month of February with the PMI index dropping from 52.0 to 51.2. This decline was a bit surprising because of the sharp improvement in the CBI Industrial Trends Survey. Although activity remained positive last month, a fall in new orders held back growth. Belt tightening inside and outside of the U.K. is beginning to affect overall demand – we will be watching the index closely to see if this drop becomes a new trend. House prices on the other hand increased 0.6 percent in February, which was much stronger than expected. To the central bank's delight, low interest rates are supporting the housing market. Sterling could continue to outperform the euro in coming days as the Monetary Policy Committee reconsiders their plans for more stimulus. Inflation is a bigger problem in the U.K. than in the U.S. and Bank of England member Weale made it clear yesterday that the chance of another round of asset purchases has declined with the latest increase in oil prices. We expect other monetary policy committee members to share this view. Construction sector PMI is due for release on Friday and we expect this report to also show improvement in housing market activity.

CAD: CURRENT ACCOUNT DEFICIT NARROWS

All of the commodity currencies strengthened against the greenback thanks to stronger data from China and the rise in oil and gold prices. The Canadian dollar rose to a year-to-date high over the dollar while both Australian and New Zealand dollars recovered some of yesterday's losses. The Australian Industry Group manufacturing index printed at 51.3 marking the third straight month of growth. The improvement in the manufacturing sector is an encouraging sign for the Reserve Bank of Australia. Nonetheless, the sector remains vulnerable to the risks stemming from a strong Aussie. While Treasurer Wayne Swan praised the commodity industry as being "a bedrock of support" for the Australian economy, the non-mining sectors lagged behind in recovery and investment. According to the Bureau of Statistics, private capital expenditure reported a 0.3 percent decrease in the fourth quarter with manufacturers forecasting an 8 percent slump next year. Moreover, the construction segment also showed more downside risks as the building approvals rose less than expected. New permits issued gained 0.9 percent versus 2 percent eyed. The divergence between the resource sectors and the non-mining industries could be a difficult task for the policymakers as they placate both sides of the economy. In Canada, the current account deficit shrank from –CAD$12.3 billion to –CAD$10.3 billion in the fourth quarter while raw material prices increased. Canadian GDP numbers are due for release tomorrow and the improvements in the US economy could translate into stronger growth for Canada. With no major economic data, kiwi and Aussie could hinge on the risk appetite.

JPY: HIGHER CAPITAL SPENDING

The Japanese yen weakened against the commodity currencies while trading higher against the greenback and the euro. Japan's domestic economy showed further signs of improvement as the capital investment picked up in the fourth quarter. Japanese firms increased spending by 7.6 percent beating the expected -6.4 percent. The latest number marked the biggest jump in five years. A few of the major drivers behind the expansion came from the restoration of the chemical facilities and transportation equipment damaged during the earthquake. According to the report, the construction of new buildings including supermarkets, drug stores, and large rental complex also picked up with the rebuilding effort heightening. Despite the recent optimistic signs, a Bank of Japan board member, Hidetoshi Kamezaki, raised concerns that higher fuel prices could hinder Japan's recovery. "We must pay close attention to further rises in oil prices as it will weigh not only on the Japanese but also on the global economy," Kamezaki said at a news conference. The country's economy has grown increasingly dependent on oil imports to make up for the shortfall in electricity generated at nuclear plants. Meanwhile, the upcoming BoJ Board appointment raised more speculation on the direction of the central bank. Japan's government will appoint two members to the nine-member board in coming weeks. As Prime Minister Yoshihiko Noda championed more cooperation between the government and the bank, his picks could offer more clues on future monetary policies. Meanwhile, we have consumer prices, unemployment rate, and household spending on docket.

USD/CAD: Currency in Play for Next 24 Hours

USD/CAD will be our currency pair in play for the next 24 hours. While we have no economic release from the US, we expect the GDP report from Canada at 8:30AM ET/ 13:30 GMT.

The strength of oil prices has kept USD/CAD in a downtrend which we determined using the double Bollinger Bands. The pair could find the nearest support at today's low of 0.9841. A break below, USD/CAD could target the 23.6% Fibonacci level at 0.9748. We drew our Fibonacci retracements from the swing high in 2010 to the record low in July 2011. On the upside, the 10-day SMA could provide resistance at 0.9949. Further up, the second resistance sits at 1.005, a level where USD/CAD has been contested twice in the past month.