Fixed Income
Total Page:16
File Type:pdf, Size:1020Kb
FX Market Headlines EUR rallies as bailout agreed Greece finally secures second bailout JPY weakens on inflation target BoE minutes indicate that more QE could be on the way EURCHF closes in on 1.20 floor Important Disclosure This document is based on information provided by Citigroup Investment Research, Citigroup Global Markets, Citigroup Global Citi analystsalth Management and Citigroup Alternative Investments. It is provided for your information only. It is not intended as an offer or solicitation for the purchase or sale of any security. Information in this document has been prepared without taking account of the objectives, financial situation or needs of any particular investor. Accordingly, investors should, before acting on the information, consider its appropriateness, having regard to their objectives, financial situation and needs. Any decision to purchase securities mentioned herein should be made based on a review of your particular circumstances with your financial adviser. Investments referred to in this document are not recommendations of Citibank or its affiliates. Although information has been obtained from and is based upon sources that Citibank believes tobe reliable, we do not guarantee its accuracy and it may be incomplete and condensed. All opinions, projections and estimates constitute the judgment of the author as of the date of publication and are subject to ch ange without notice. Prices and availability of financial instruments also are subject to change without notice. Past performance is no guarantee of future results. The document is not to be construed as a solicitation or recommendation of investment advice. Subject to the nature and contents of the document, the investments described herein are subject to fluctuations in price and/or value and investors may get back less than originally invested. Certain high-volatility investments can be subject to sudden and large falls in value that could equal the amount invested. Certain investments contained in the document may have tax implications for private customers whereby levels and basis of taxation may be subject to change. Citibank does not provide tax advice and investors should seek advice from a tax adviser. Other Sources: Reuters, Bloomberg, CIRA. Products are (i) not insured by any government agency; (ii) not a deposit or other obligation of, or guaranteed by, the depos itory institution; and (iii) subject to investment risks, including possible loss of the principal amount invested Citi Investment Research & Analysis (CIRA) is a division of Citigroup Global Markets Inc. (the "Firm"), which does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the Firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. For more information, please refer to https://www.citigroupgeo.com/geopublic/Disclosures/FSAConflicts.html Citibank N.A., London Branch is authorised and regulated by the Financial Services Authority (FSA) with reference number 124704. Citibank International Plc is authorised and regulated by the FSA with reference number 122342. Citibank N.A., Jersey Branch, is regulated by the Jersey Financial Services Commission under the Financial Services (Jersey) Law 1998 for the conduct of investment business. Citigroup is a registered business name of Citibank (Channel Islands) Limited. Citibank N.A., London Branch and Cit ibank International Plc are licensed by the Office of Fair Trading with license numbers 0001486 and 0482552 respectively to extend credit under the Consumer Credit Act 2006. Citibank N.A., London Branch is registered as a branch in the UK at Citigroup Centre, Canada Square, Canary Wharf, London E14 5LB. Registered number BR001018. Citibank N.A., Jersey Branch has its registered office at PO Box 104, 38 Esplanade, St Helier, Jersey JE4 8QB. Citibank International Plc has its registered office at Citigroup Centre, Canada Square, Canary Wharf, London E14 5LB Citibank N.A., is incorporated with limited liability in the USA. Head office: 399 Park Avenue, New York, NY 10043, U.S.A. © 2011 Citibank N.A. CITI, CITI and Arc Design and CITIBANK are registered service marks of Citigroup Inc and its affiliates. Calls may be monitored or recorded for training and service quality purpos es. The FX market was dominated by a rally for the euro and a decline for the Japanese yen last week. The common currency strengthened as Greece finally secured the second bailout. Markets have been bidding up Euro ahead of this week's send long term LTRO from the ECB. Meanwhile, the Japanese yen's fall accelerated on BoJ QE expectations as well as strength in crude oil. Markets were rather subdued elsewhere though, as the US dollar was range bound against sterling and commodity currencies. Technically, the sustainability of Euro's rally is not confirmed yet but yen's reversal looks real. EU finance ministers eventually approved the second Greek bailout package. The deal requires Greece to bring its debt down to 120.5% of GDP by 2020 from over 164% currently. The agreed reduction was similar to what was requested by the IMF. Moreover, according to Jean-Claude Juncker, the prime minister of Luxembourg, private sector bondholders were expected to incur losses of 53.5% of nominal face value of their Greek bond holdings, up from the previously expected 50.0% nominal write-down. The interest that Greece needs to pay for the first bailout package was lowered to 1.5% over market rates from 2-3% above market rates previously agreed. Moreover, the ECB and the 17 central banks in the Eurozone also agreed to forego profits on their Greek debt holdings. These measures aim to 'further improve the sustainability of Greece's public debt'. Following the approval, Greece launched the private sector bond swap offer on Friday and the program targets to write-down as much as EUR 100b of its debt. The Greek Finance Ministry noted that at least 90% of the aggregate face amount of all bonds is needed to participate in the PSI. If the participation is between 75% and 90%, Greece might activate the collective-action clauses and that might in turn trigger CDS. Greece will determine whether the take-up rate from investors is enough for the debt deal to proceed by March 9 while actual swap will take place on March 12. IIF managing director Dallara said he's "quite optimistic" of a high take up among bondholders. But all eyes will be on market responses in the next two weeks. Also supporting the single currency last week was anticipation and speculation ahead of this week's second LTRO from ECB. In the first operation in December, over 500 banks tapped EUR 489b in three year cheap loans from ECB. There have been expectations that this time banks might request as much as EUR 1T, but consensus expectations are around EUR 500b level. The impact to the market is a bit tricky. Some economists say that if the take up is smaller than expected, the impact would be short term bullish and medium term bearish in Euro. On the other hand, if the take up is larger than expected, the impact would be short term bearish and medium term bullish in Euro. Yen's selloff was another major theme last week. Yen weakness started earlier this month after BoJ announced a clear 1% inflation goal. The target is seen as paving the way to more aggressive quantitative easing from the bank. So far, the BoJ lagged behind Fed and ECB in expanding their balance sheets since 2008 finance crisis. Thus, in spite of BoJ's various efforts including intervention, it failed to halt yen's up trend. However, the situation could now be different as there is a clear inflation target. The BoJ indeed has more scope to expand quantitative easing than any other major central banks. There is speculation that the BoJ's QE program could top as much as JPY 100T in 2012. Elsewhere, BOE minutes for the February meeting revealed that 2 (Adam Posen and David Miles) out of 9 members opted for more expansion in asset purchases than decided. The 2 dissenters to the current monetary policy saw a risk of a prolonged period of depressed demand which would cause inflation to fall materially below target in the medium-term. Also, they expected that further easing would alleviate the risks of increasing unemployment. The news raised speculations that the central may increase the amount of asset buying in May The RBA released minutes for the February meeting, explaining reasons for its decision to leave the policy rate unchanged at 4.25%, instead of a reduction of -25 bps as expected by the market. The central bank appeared comfortable with the domestic economic developments though these might also be affected by the sovereign debt crisis in the Eurozone. It appears that the central bank will stand on the sideline in the coming months. The market nervously watches EURCHF as it nears the post-peg low of 1.2023. USDCHF is also heavy, hitting a low of 0.8930. The case for SNB intervention is getting much louder. AUDUSD ended the week slightly heavy around 1.0690 though leveraged, real money and bank names add to positions - possible leadership issues adding to AUD heaviness but the only real impact of a change in PM would likely be the mining tax - Rudd seen more mining friendly G20 finance ministers and central bankers met in Mexico over the weekend. The main topic of the weekend - discussion on how to increase the IMF’s resources and the possibility of increasing the size of the IMF or combining the EFSF and ESM The ECB’s LTRO tender follows on February 29, global manufacturing PMI data (March 1), and GDP reports for Switzerland (March 1) and Canada (March 2) come thereafter.