Optimism About PSI Boosts Risk Appetite

NEW YORK ( BBH FX Strategy) -- The dollar is weaker against most major and emerging market currencies with Greece still the major focus. The euro broke above 1.32 against the dollar in the European morning as it becomes evident that the Greek PSI deal will likely go through, as we had expected.

The next level to watch on the upside for EUR/USD is the 100-day moving average at 1.3268. AUD and NZD are both up about 0.75% against the dollar, ignoring weaker employment data in Australia and a dovish statement by the Reserve Bank of New Zealand, while NOK and SEK are up over 1%.

Once again, JPY is the notable outlier, falling 0.5% against the dollar and rapidly approaching its recent high of 81.87 earlier this month. This follows a string of weaker data overnight including a record current account deficit in January, faster contraction of GDP in the fourth quarter, and a dismal 8.6% contraction in machinery orders. Moreover, the weekly securities transactions showed Japanese investment outflows continue.

Follow TheStreet on Twitter and become a fan on Facebook.

In sovereign debt markets, optimism toward the PSI agreement helped drive the spread between German and Italian 10-year debt below 300 basis points, the lowest level since early September driven by a 15-basis-point decline in Italian debt. Spanish yields are also lower but only by five basis points, thus widening further the spread between Italian and Spanish debt, now at 25 basis points, a level not seen since July 2011.

However, it is important to note that Portuguese yields continue to trend higher, rising five basis points on the day. This is consistent with our view that, while markets and the euro will likely rally on a muddle-through Greece deal, closure on the debt crisis is unlikely. The next countries to come under pressure will probably be Portugal or Spain.

Global equity markets are sharply higher with S&P futures up 0.9% and the Euro Stoxx up 1.7% led by solid gains in the financial sector, especially banks. The MSCI Asia Pacific Index is up 1.2% and the Nikkei closed 2% higher, with gains in part supported by expectations that a weaker yen will boost exporters.