FOREX: US Dollar Slumps On China Rate Cut, Greek Bailout Deal Hopes

By Ilya Spivak, Currency Strategist

Talking Points

• Dollar, Yen Slump in Asia as China Cuts Reserve Requirement Ratio by 50bps
• Eurozone FinMin Summit in Focus as Traders Wait for Greek Bailout Accord
• Risk Appetite Expected to Falter Again, Yielding Dollar Buying Opportunities

The US Dollar and Japanese Yen fell against their major counterparts as stocks rose in overnight trade, marking an improvement in risk appetite to start the trading week and sapping demand for the go-to safe haven currencies. The MSCI Asia Pacific regional benchmark equity index rose 0.9 percent after China cut the reserve-requirement ratio for the country’s banks by 50bps effective February 24. The move increases the supply of loan-able funds by allowing banks to lend out a greater percentage of their deposits, reducing borrowing costs with the hope of stoking economic activity.

Optimism was compounded by hopeful anticipation of a final deal on the second Greek bailout package as Eurozone finance ministers gather for a meeting in Brussels today. Traders are betting the sit-down will culminate in the provision of €130 billion in EU/IMF funding to stave off a Greek default as a large tranche of maturing debt comes due on March 20. The accord must deliver on two elements: Athens has to iron out the terms of a bond swap with its private-sector creditors – a scheme meant to ease its debt burden by dismissing as much as 70 percent of what is owed and exchanging the rest for longer-dated paper – as well as put to rest EU officials’ concerns about implementation of new austerity measures.

T he long history of flawed fixes to the debt crisis unveiled over the past three years suggests that the very existence of an accord is likely to prove initially supportive for risk appetite , regardless of its merits . This spells trouble for safe-haven currencies at least at the onset, but that is unlikely to last. As we discussed earlier , a Greek default (even a disorderly one) is no longer the danger it once was considering EU banks borrowed enough capital through the ECB’s 3-year LTRO in December to assure a credit squeeze would probably not materialize. This means whatever EU officials come up with will not amount to a meaningful change in the existing fundamental landscape, with traders quickly shifting their focus back to the overall macroeconomic landscape.

On balance, it seems likely that this transition will prove negative for risk appetite. Economists’ forecasts suggest the Eurozone – collectively the world’s largest economy – will sink into recession this year, severely denting global performance expectations as a whole. Indeed, economists’ median world GDP expectations for 2012 have been sinking precipitously since early August. The reemergence of this stark reality is likely to be punishing for the Euro as well as sentiment-sensitive currencies like the Australian, New Zealand and Canadian Dollars . With this in mind, we are looking for US Dollar buying opportunities to emerge in the days ahead.

Asia Session : What Happened

GMT	CCY	EVENT	ACT	EXP	PREV
21:30	NZD	Performance Services Index (JAN)	53.6	-	50.9 (R+)
21:45	NZD	Producer Prices – Inputs (QoQ) (4Q)	0.5%	0.4%	0.6%
21:45	NZD	Producer Prices – Outputs (QoQ) (4Q)	0.1%	0.5%	0.2%
23:50	JPY	Merchandise Trade Balance Total (¥) (JAN)	-1475B	-1456.3B	-205.6B (R-)
23:50	JPY	Adj Merchandise Trade Balance (¥) (JAN)	-612.8B	-847.8B	-568.7B (R-)
23:50	JPY	Merchandise Trade Exports (YoY) (JAN)	-9.3	-9.4	-8.0
23:50	JPY	Merchandise Trade Imports (YoY) (JAN)	9.8	9.6	8.1
0:01	GBP	Rightmove House Prices (MoM) (FEB)	4.1%	-	-0.8%
0:01	GBP	Rightmove House Prices (YoY) (FEB)	1.4%	-	0.4%
5:00	JPY	Coincident Index (DEC F)	93.6	-	93.2
5:00	JPY	Leading Index (DEC F)	94.0	-	94.3
5:30	JPY	Nationwide Dept Store Sales (YoY) (JAN)	-1.1%	-	0.8%
5:30	JPY	Tokyo Dept Store Sales (YoY) (JAN)	-3.1%	-	0.3%
7:00	JPY	Convenience Store Sales (YoY) (JAN)	1.7%	-	4.1%

E uro Session: What to Expect

GMT	CCY	EVENT	EXP	PREV	IMPACT
7:45	EUR	French Own Company Production Outlook (FEB)	-	-6	Low
7:45	EUR	French Business Confidence Indicator (FEB)	92	91	Low
7:45	EUR	French Production Outlook Indicator (FEB)	-36	-37	Low
9:00	EUR	Italian Industrial Orders (MoM) (DEC)	0.4%	0.1%	Low
9:00	EUR	Italian Industrial Orders (YoY) (DEC)	-5.6%	-0.7%	Low
9:00	EUR	Italian Industrial Sales (MoM) (DEC)	-	0.0%	Low
9:00	EUR	Italian Industrial Sales (YoY) (DEC)	-	0.2%	Low
14:30	EUR	Eurozone Finance Ministers Meet in Brussels	-	-	High

Critical Levels

CCY	SUPPORT	RESISTANCE
EURUSD	1.3104	1.3234
GBPUSD	1.5791	1.5898

--- 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/2012/02/20/FOREX_US_Dollar_Slumps_on_China_Rate_Cut_Greek_Bailout_Deal_Hopes.html

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