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At 1530GMT/ 1030 ET Europe's finance ministers will meet and hopefully agree that Athens' latest austerity efforts are good enough for them to receive their second bailout from the IMF/ EU and ECB. But as we start the European session we are seeing a bit of a pullback in risk after a strong start during the Asia session.
Right now this is a very normal pullback. The US is out on holiday today and as we enter European trading hours headline risk has massively increased, so investors are booking profits where they can. This has seen EURUSD back away from 1.3240 high and AUDUSD climb down from 1.08, although uptrends remain intact. While the markets lie in wait for the Eurozone finance ministers' meeting later this afternoon we need to take our cue from the technical signals. In EURUSD any pullback to the 1.3150 level is normal, but below there then the fundamental back drop is likely to have changed for the worse (negative headlines from Greece or the Eurozone's finance ministers' meeting).
The outcome of today's meeting is likely to define the performance of risk assets for the rest of the week. Right now the markets are not priced for an outright collapse of talks between Greece and the Eurozone finance ministers, but there are still many hurdles on the road to Greece paying its EUR14.5bn bond redemption payment on March 20th. Even the chair of the Eurogroup Juncker has said that much negotiation is still needed.
Firstly at this meeting the PSI deal is expected to be agreed, the ECB's position regarding the debt swap is also expected to be formalised and the Eurozone authorities need to be happy that Greece will implement the harshest austerity measures yet and will stick with its bailout conditions regardless of the outcome of April's elections.
The PSI discussions took an interesting turn at the weekend. It was announced that the ECB would participate in the bond swap with Greece, but it would not face Collective Action Clauses (CACS), unlike other holders of Greek debt. Essentially European authorities can force losses on private bond holders but not on the ECB. I wrote about this yesterday and quoted Pimco chairman Bill Gross who said that this threatened the integrity not just of Greek bonds but of bonds across the entire Eurozone. But this has fallen on deaf ears this morning and Italian bonds have opened higher this morning (yields lower). Even Portugal, which has been targeted as the most at risk Eurozone nation after Greece, has seen its bond yields fall this morning. Thus, if today's meeting finalises the details of the PSI negotiations then the market may concentrate on the CAC/ no CAC ECB debate, which has the potential to dampen sentiment.
There is also some confusion over whether Greece will get all of its bailout funds or if funds will be withheld until after the April elections. This is the line of action being pursued by the Dutch authorities. The other option is that a portion of Greek bailout funds are placed in an escrow account so that they are used to pay bond redemptions and can't be used to fund public spending. This would limit Greece's sovereignty over its own budgets, but would reduce the risk of a third or fourth bailout somewhere down the line.
So the discussions this afternoon could be long and messy and we don't know for sure if Greece will get the funds it needs. But for now the markets believe it will hence the bullish tone to markets this morning and asset classes are moving higher in unison.
The China RRR cut on Saturday helped to boost sentiment during the Asia session as yet central bank pumps liquidity back into its economy. The US is out on holiday today and US stock markets are not open, so expect the emphasis to be squarely on Greece later.
Kathleen Brooks| Research Director UK EMEA | FOREX.com
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