Dollar Broadly Stronger as ISDA Decision and NFP Looms

The Greek government said PSI went through with a 95.7% participation rate after CACs were activated. Before the CACs, however, that rate was only 85.8%. ISDA’s determinations committee will decide today at 08:00 EST whether a credit event has occurred, which given past comments suggest that it will be in the affirmative.

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The dollar is firmer against major and EM currencies. The euro failed to hold above the 100-day MA around 1.3261 as the initial excitement from the PSI success faded, unable to break the 1.3291 retracement level from the Feb-March drop. USD/JPY touched a 9 month high at 81.90, driven in part by Japanese importers selling yen. Periphery 10-year sovereign debt is little changed with the exception of Portuguese yields, which are down 15 bp. The Euro Stoxx index is down 0.2% and S&P futures are flat. Asian equities closed higher with the Nikkei up 1.6% to its best level since August 2011 and close to the key psychological level of 10,000, while the MSCI Asia Pacific was up 1.1%. The Shanghai index closed just off the highs of the day after February CPI in China fell to a 20-month low of 3.2% y/y. Hopes of further stimulus including RRR cuts trumped less favorable data, including lower-than-expected new loans and retail sales. We still believe that the market is underestimating the amount of forthcoming stimulus.

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The Greek government said PSI went through with a 95.7% participation rate after CACs were activated. Before the CACs, however, that rate was only 85.8%. ISDA’s determinations committee will decide today at 08:00 EST whether a credit event has occurred, which given past comments suggest that it will be in the affirmative. While it would be tempting to blame today’s euro losses to classic buy the rumor sell the fact action, we suspect concern about a credit event and the murkiness of the CDS market is a major factor too as recent market optimism likely reflected hopes that CACs would not have to be invoked. EU leaders have moved the scheduled conference call to discuss giving the final approval of the second bailout for Greece to 08:30 EST. As a reminder that the Greek story is by no means over, Q4 GDP data was revised lower to -7.5% y/y from the -7.0% y/y flash estimate. With the economy likely to contract sharply in 2012, budget targets will be almost impossible to meet this year. In related news, the EU will send budget inspectors to Spain in response to that nation’s upwardly adjusted budget deficit forecasts announced unilaterally last week. We know from Draghi’s comments Thursday that the ECB does not plan to do LTRO 3, and that the ball is back in the courts of the governments to continue fiscal discipline. The debt crisis is by no means settled, with other potential shoes poised to drop in 2012.

Jobs data today will make things tricky, coming right near the ISDA decision and Eurogroup call. Consensus for February NFP is +215k vs. +170k in January, and would be consistent with continued improvement in the US labor market. Indeed, we still believe that the fundamental theme of an improved US outlook coupled with euro zone recession could help the dollar to continue firming even after this current bout of euro zone turmoil ends. Indeed, the correlation between EUR and the S&P has been rising again, suggesting that a positive surprise in NFP could lead to some short-term EUR strengthen. The 30-day percentage change correlation between the two rose to 0.61, up from a recent low of 0.57 in late February, but still much lower than the high of 0.855 in December. More broadly, however, euro zone stresses remain in play meaning that the upside for the euro is likely to be limited. Not that the spread between 2-year US and German yields has continued to widen steadily in favor of the US. At 15 bp, the spread between the two is now back to levels not seen since June 2010 as US yields steadily move higher and Germany lower. While the 30-day correlation has shifted over time, we are for now back in the area whereby wider spreads in favor of the US go hand in hand with dollar strength.

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Data out of EU shows that German is still the linchpin of economic optimism in the euro zone. Following yesterday’s strong-than-expected IP numbers in Germany, both exports and imports for January rose by more than expected on a m/m basis. In contrast, IP in France and Italy surprised on the downside, both contracting on a y/y basis by more than expected. Similarly, retail sales in Spain contracted faster than expected at -6% y/y. IP in Sweden surprised on the up side as well, but there was little sustained impact on EUR/SEK. Meanwhile, UK IP was much weaker than expected at -0.4% m/m. While this may have been driven by some distortions, the print has weighed on sterling as possible further QE remains in play.

Brazil February IPCA inflation came out right on expectations of 5.8% y/y vs. 6.22% y/y in February. Inflation is still very elevated and some investors are getting a bit nervous about the aggressive easing stance by Bacen. The 1.80 level is still the key one to watch on the upside. USD/BRL got as high as 1.7805 yesterday before playing some catchup with the rest of EM, which rallied on Greece optimism. For now, the wide 1.70-1.80 range seems in play. The RBI unexpectedly cut the cash reserve ratio by 75 bp to improve bank liquidity. The move is expected to add 480 bn rupees to the system.

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