Euro recovered, albeit partially, its strength that it had lost following downgrade of nine-European countries by Standard and Poor's last week. The optimism is largely based on hopes that investors in Greece may reach an understanding. A successful European bond auction also helped the sentiments.
The Eurozone currency got a further boost as the IMF announced that it will approach China, Japan, Brazil, Russia, India and others to arrange USD 500 billion, as the Fund currently has USD 385 billion available with it while the potential need for Eurozone is around USD 1-Trillion. The IMF wants a firm commitment at the G-20 meeting which is scheduled to be held in Mexico City on February 23-26.
This week, the market will be keenly waiting to hear more about the development/outcome of the meeting between Institute of International Finance (IIF) representing on behalf of the investors and Greece officials to know how much loss the bond holders agreed to book that will help in determining the fate of Greece default. This deal would enable Greece to obtain another bailout instalment. The country requires a bailout funding of Euro 14.4 billion by March 20 to avert default.
The problem that Greece could come across is that it is yet not known that despite reaching an agreement the rating agencies may not spare Greece from a default status because this deal is between private creditors, which does not solve Greece's problem. In this discussion, the ECB and the IMF are not in the negotiating team.
The country has a net government debt of Euro 338 billion. The private sectors debt is roughly around Euro 200 billion and Greece is seeking a 50 percent write-down. The deal would cause a huge loss to the private sector - between 65-70 percent, according to rough estimates.
The idea behind this structured deal of taking a loss and swapping private creditors' old bonds with the new ones at a fresh negotiated rate of lower value will ultimately reduce the debt, which is known as "Haircut".
On the flip side, there is a huge risk that if talks fail Greece will not be able to service its debt and it will default in March, which can once again trigger a crisis-like situation in Eurozone region that can rapidly spread to other continents. "Thorn in the flesh", is reaching an agreement on coupon interest, which the creditors are demanding on an average of over 4 percent that includes both short dated and long-term bond maturities.
Talks failure could mean that banks in Europe will refrain from regular dealing (Lending/Borrowing) with each other because most of the banks are unaware of the banks' exposure that are kept secret.
However, successful Greece talks will be nothing more than a sweetener and not the cure, which may temporarily help the market take a breather for few days before another issue, as Euro region's financial market is full of problems and unresolved issues.
Meanwhile, latest report released by the IMF and the World Bank are not very encouraging as they have made a downward adjustment of Global and European GDP growth, while maintaining US growth forecast at 1.8 percent. China is already showing a sign of easing in its growth sector, which means Europe has extremely tough days ahead. If growth in the US is low and China is down growth-wise then a strong growth in smaller Asian economies may not be just sufficient to propel world's ailing economies, which is bad news for Europe.
Fx & Gold - weekly outlook January 23-27
GOLD @ $1666.30: Due to Greece uncertainty, late weekend buying of gold was seen in exchange of Euro. Another factor that is supporting the yellow metal is based on a market belief that the Federal Reserve may soon go for 3rd quantitative easing through which Fed will buy assets such as mortgage-backed securities or Treasuries from banks that will inject an ample of liquidity in the market.
I don't find much substance in talk that could muster enough support for gold. More importantly, it is worth noting that the genuine buyers of gold from China will remain absent from the market for about one week to 10 days, as they will be celebrating Lunar New Year.
Whereas India's home remittances have surged recently, as Non-Resident Indians (NRIs) are taking advantage of a weak Indian Rupee instead of investing in gold. I consider Friday's rally as a technical move. A lot will therefore depend on Greece's outcome. During the week, gold should get protection around $1688 if $1676 surrenders and only break and New York close above the upper support level would risk further gains. Suggest selling, which is on the rise, as gold could see a sharp slide and lose $70-80. A break of $1638 would encourage for a test of $1610.
EURO @ 1.2930: Euro comfortably closed below 1.2990, but this does not imply that Euro cannot breach this crucial level. Risk of an upside break will increase if 1.3050 surrenders and Euro could test 1.3127. However, this is not a preferable move as my charts suggest that there is a bigger threat of a downside move which requires a push below 1.2810, if breaks Euro could skid sharply down and may test 1.2545. Preferable strategy is to sell Euro at the top of the range.
GBP @ 1.5574: Cables' next resistance is at 1.5676, which should not be easy to crack. Failing to hold this level would increase the risk for a test of 1.5790 - a move not favoured as any surge should get exhausted around 1.5650s, a break dip and below 1.5470 would encourage for re-test of 1.5313.
CHF @ 0.9343: SFR strength against Euro could become a challenge for the Swiss Central Bank, which could step in if SFR continues to flex its muscles. The next major resistance level to watch is at 0.9204. However, a break of 0.9480 would pave way for 0.9680.
JPY @ 77.01...Yen has very strong support at 77.45. Only a break of this level would pave way for 77.67 or 77.98. However, a break of resistance level 76.40 could push Yen further towards 76.13.