Currency Major Pairs Analysis: February 16, 2012

Europe’s creditor countries struggled to bridge divisions over a rescue of Greece, seeking more control over how future aid is spent as the clock ticked toward a possible default next month. In a replay of the brinkmanship that marked the early stages of the Greek crisis two years ago, euro-area finance ministers extracted concessions from political leaders in Athens intended to pave the way for the endorsement of a 130 billion-euro ($171 billion) aid package next week. While further considerations are necessary regarding the specific mechanisms to strengthen the surveillance of program implementation, Europe is set to make all the necessary decisions on February 20.Greece’s plea for more aid on top of the 110 billion Euros awarded in 2010 has stirred recriminations on both sides of Europe’s north-south economic divide, with taxpayers in better-off countries rebelling against further handouts. Each day lost brings Greece closer to March 20 bond redemption when it must make a 14.5 billion-euro payment or become the first country in the euro’s 13-year history to default. Greece made substantial further progress by outlining 325 million Euros in additional savings and providing written pledges from the leaders of its two main parties not to backslide on the budget cuts.

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GBP/USD

Bank of England Governor  Mervyn King said policy makers can expand their stimulus program further if needed to ward off the threat to Britain’s slow and uncertain recovery posed by the euro region’s debt crisis. The central bank expanded its bond-purchase program to 325 billion pounds ($510 billion) this month after the economy shrank in the fourth quarter. Policy makers raised their forecast for inflation today, predicting an undershoot of their 2 percent goal in two years and an even chance of reaching it in three years. The path of recovery is likely to be slow and uncertain, and for much of this year, there is likely to be a pattern of alternating positive and negative quarterly growth rates. The biggest risk to the recovery stems from developments in the euro area, where there remain concerns about the indebtedness and competitiveness of some member countries. The pound was little changed against the dollar, trading at $1.5686 in London. It weakened against higher-yielding currencies such as the New Zealand and Australian dollars. The yield on the two-year gilt was at 0.40 percent. The Bank of England also said that failure to implement reforms in the euro area could trigger a disorderly outcome and result in sharply lower growth in the region.

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USD/JPY

Japanese stocks fell for the first time in four days after European policy makers postponed a second bailout for Greece, reigniting concern the region’s debt crisis will hurt exporters’ earnings outlook. Kyocera Corp., an electronics maker that gets almost 20 percent of its sales in Europe, lost 1 percent. Mitsubishi UFJ Financial Group Inc., Japan’s top lender by market value, slid 1.2 percent. Olympus Corp., a camera maker still reeling from an accounting scandal, fell 1.3 percent on report prosecutors will question former top executives. The Nikkei 225 Stock Average fell 0.2 percent to 9,245.37 as of 9:06 a.m. in Tokyo. The broader Topix Index lost 0.2 percent to 801.25, with twice as many shares declining as advancing.There’s a persistent concern that creditors may have to pardon parts of debt not only for Greece, but also for other southern European nations. Technical indicators show Japan’s stocks are being overbought, and we should see a sell-off as investors take profits.

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USD/CAD

The Canadian dollar fell for the first day this week versus its U.S. counterpart as bets that an aid package for Greece may be delayed until after it holds elections this year damped appetite for riskier assets. The currency rose earlier the most in almost two weeks as crude oil, Canada’s biggest export, climbed. The loonie weakened after Greek Finance Minister Evangelos Venizelos said Europe’s wealthier countries are toying with the idea of expelling his nation from the 17-nation euro area. The Canadian dollar is reacting to all of the headlines out of Europe. There is still a lot of uncertainty out of Europe. Unless we get a clearer sign the bailout will be approved, it will be hard for sentiment to be positive. Canada’s dollar depreciated 0.1 percent to parity with the greenback. It advanced earlier as much as 0.5 percent to 99.38 cents, the strongest level since Feb. 9.The Standard & Poor’s 500 Index dropped 0.5 percent after rising as much as 0.4 percent. The loonie has a 60-day correlation coefficient of 0.83 with the equity gauge. A reading of 1 would indicate they move in lockstep. Crude oil touched $102.54 a barrel in New York, the highest level since Jan. 12, before trading at $101.88, up 0.9 percent.

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