Currency Briefing - what you need to know for Fri Feb 17, 2012

The Singapore dollar gained some ground but saw any further rises capped amidst Greece's sovereign debt troubles.

Justin Harper, IG Markets Singapore head of research, said:

The Singapore dollar gained some ground on the US dollar edging up to $1.2607. The US economy put out some strong economic figures last night which gave a boost to investor confidence.

Such an uplift in sentiment means traders are happy to take their cash out of safe haven assets and move them into riskier assets, to the detriment of the greenback.

But the Singapore dollar saw any further rises capped due to the continued uncertainty over Greece's sovereign debt troubles. This cloud also dampened other Asian currencies.

Today Singapore saw its January export figures released which showed, while they edged up 0.9% last month, they are down 2.1% on a year-on-year basis. This could have some bearing on the currency once the news is digested.

There is also a Government Budget this afternoon which will set out the agenda for the coming years and reveal the state of health of the economy. But this will still be overshadowed by more influential news coming out of the US, which continues to be positive.

Market sentiment in the region was also kept in check by another negative announcement by ratings agency Moody’s. It is putting 17 global banks and 114 European financial institutions on review for possible credit-rating downgrade.

In context the Singapore dollar did face some downward pressure yesterday with its GDP figures showing a 2.5% contraction in the last quarter of Q4. The currency showed its resilience as it held steady, although in the local bond market, prices rose slightly investors sought the safety of government bonds.

GFT, on the other hand, reported:

Thanks to the European Central Bank, the EUR/USD avoided a close below 1.30 but the ECB can only take so much credit for the move because it was driven by outside reports and not any official announcements.

One of the biggest question marks in the Greek debt saga was how the ECB would handle their holdings of Greek bonds. There was speculation that they would sell the bonds at their original purchase price back to Greece, effectively reducing the country’s debt obligations.

Another option was to transfer the bonds to the EFSF at cost. We learned today from Die Welt, a German newspaper that the central bank will be swapping its current Greek bonds for new bonds and will be passing on their profits to European governments. There has been no confirmation by the ECB of this intention but the unidentified central bank official expects this to occur by Monday.

The governments can do with the profits as they please but the general belief is that they would use the money to fund a second bailout for Greece. Although Greece would have preferred to have the notional value of their bonds written down, they will have no choice but to accept whatever the ECB gives them.

We can tell by today’s price action in the EUR/USD exactly how much investors want and hope that a deal will be done to save Greece from default. The pullback that we saw this week was limited and as soon as any good news hit the wires, even if it is unsubstantiated, investors were quick to jump back into euros.

Meanwhile RBS noted:

The German Ministry of Finance downplayed talk of potentially delaying the second bailout until after the Greek elections in April. Subsequent press reports on possible progress on the second Greek bailout, including ECB participation, were well-received by market participants and bolstered risk-seeking sentiment, with US equities closing up about 1%.

Among G10 currencies, the USD ceded ground to all but the JPY on the renewed bounce in sentiment, with EUR/USD pushing back above 1.31 and GBP/USD moving above 1.58. USD/JPY, meanwhile, continued to diverge from relative 5-year interest rate swap differentials between the US and Japan as it steadily climbed higher, stopping just shy of 79 several times late in the session.