ECB Saves Euro... Well, Sort Of

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.  Monday is going to be a big day for Europe. Aside from possible completion of the bond swap (though the ECB would have to announce their plans before moving forward), the Eurogroup is expected to make some important decisions. EU President Juncker is hopeful that this will happen but having been short changed too often, we can’t help but be a bit skeptical. Nonetheless a deal appears to be close with German lawmakers targeting a Greek bailout approval on Monday.   Unfortunately it will not be the meeting that will end all meetings. The EU will be holding a special Euro Summit on March 2 nd to discuss increasing the firepower of their rescue fund. Growth, employment and austerity measures will also be discussed and of course, no meeting can be held these days without some talk about Greece. For the time being, 1.30 appears to be the near term floor in the EUR/USD. While many central banks are saying that their monetary policy decisions are “data dependent,” the fate of the EUR/USD is headline dependent. If European officials continue to talk about progress being made and the possibility of approval on bailout funds Monday, the EUR/USD will extend its rise. February 20 th will be judgment day for the euro and we can only hope that investors will not be sorely disappointed.

USD: JOBLESS CLAIMS CONTRIBUTES TO IMPROVEMENT IN RISK

U.S. stocks traded sharply higher today on the renewed hope that Greece will avoid default. This is an evolving situation that changes day by day and today, investors have chosen to buy into the speculation. Amidst all of the uncertainty about Greece, U.S. economic data continues to surprise to the upside (at least the important reports).   Weekly jobless claims dropped to 348k from 361k, the fewest since March 2008. This is the first time that we have seen claims fall below 350k in nearly 4 years and the significance has not been lost on investors. The Philadelphia Fed index also rose to a four month high of 10.2 from 9.0, a sign that the manufacturing sector continues to fuel the U.S. recovery. The housing market on the other hand is not doing nearly as well.   Housing starts and building permits rose less than expected last month. Starts increased 1.5 percent compared to a 2.7 percent forecast while permits rose 0.7 percent vs. 1.3 percent expected. Although these numbers were slightly disappointing, the fact that starts and permits are increasing at all is good news. At the end of the day, we cannot expect a full blown recovery in housing until the unemployment rate sinks back below 7 percent. The sheer number of people out of work and concerns about job security will keep housing demand weak. Producer prices grew a mere 0.1 percent in the month of January versus 0.4 percent expected. Excluding food and energy, price growth was slightly stronger - rising 0.4 percent last month. As yesterday's FOMC minutes pointed out, as long as inflation is muted, QE3 remains a possibility. Considering that the central bank focuses more heavily on consumer prices, tomorrow’s CPI report will be extremely important.  The drop in jobless claims eases pressure on the Fed to increase asset purchases but job growth is more important than job losses. Although it is encouraging that fewer people are filing for unemployment benefits, what the Fed really wants to see is more people attaining new jobs and we will have to wait until next month's non-farm payrolls report for results on that front. The "irrefutable" improvements in the labor market are still happening too slowly which explains the central bank's frustration with the pace of recovery. Aside from CPI, leading indicators are also scheduled for release and an uptick is expected courtesy of the rise in U.S. equities and decline in jobless claims.