EUR/USD Fx Commentary February 28, 2012
The EUR/USD is going to be interesting to trade over the next couple days. With the S&P downgrading Greece to Selective Default and the German parliament voting overwhelmingly to give Greece the next bail out things are only going to get more dodgy with the LTRO tomorrow (the 29th) and the ISDA (International Swaps and Derivatives Association) deciding whether to consider the question of is Greece in default from their perspective. If they do decide to consider it then that will open the door on a credit event worthy of triggering the CDS. (credit default swaps)
First lets discuss the LTRO. This round has potential to rock the Euro since it is the second and expected to be much larger than the first. Depending on the amount issued (if it is as large as many expect) its going to send a message to the markets that European banks are in far worse shape than they say. However if its small then the reaction in the market has potential to be muted as much of this should be priced in by now. If it does as I expect and the take up is large I expect an initial pop to the upside as the smart money takes advantage of the optimism that the banks are shoring them self up and will be well funded for the coming Greek default but then the reality of just how bad these banks finances are will set in and the credit crunch will get worse in the coming days or weeks. Euro negative. The fact is if you were a bank that took advantage of the LTRO because you are near bankruptcy why would you lend to another bank that used LTRO funds also? Not good any way you look at it.
The ISDA is in between a rock and a hard place right now. On one hand they have plenty of evidence that Greece has already defaulted by subordinating investor bonds to the ECB held bonds the swapped so the ECB didn’t get affected by the retroactive CAC clauses just passed by the Greek government and take a loss. Here is the question they will consider and the statement released yesterday. Here is the document from the ISDA.
Does the announcement of the passage by the Greek parliament of legislation that approves the implementation of an exchange offer and vote providing for collective action clauses (“CACs”) that impose a “haircut amounting to 53.5%” (MINFIN Announcement, 2.21.2012) that “shall bind the entirety of the Bondholders [of eligible instruments]” (First Article, Section 9), constitute a Restructuring Credit Event in accordance with Section 4.7 of the 2003 ISDA Credit Derivatives Definitions (as amended by the 2009 ISDA Credit Derivatives Determinations Committees, Auction Settlement and Restructuring Supplement to the 2003 ISDA Credit Derivatives Definitions, published on July 14, 2009) because (i) the European Central Bank and National Central Banks benefitted from “a change in the ranking in priority of payment”as a result of the Hellenic Republic exclusively offering them the ability to exchange out of their “eligible instruments” prior to the exchange and implementation of the CACs, thereby effectively “causing the Subordination” of all remaining holders of eligible instruments, and (ii) this announcement results directly or indirectly from a deterioration in the creditworthiness or financial condition of the Hellenic Republic?
LONDON, February 27, 2012 – The International Swaps and Derivatives Association, Inc. (ISDA), as secretary to the Determinations Committees (the DCs), today announced that a question relating to the Hellenic Republic has been submitted to the EMEA Determinations Committee.
In accordance with the Determinations Committee process, the EMEA Determinations Committee will decide whether to accept the question for deliberation or reject it and this decision will be made by5PM GMT on Wednesday, February 29, 2012.
Awesome! This release will coincide (or very close) with the LTRO. Isn’t that just dandy? What makes this such a rough spot for these guys is that they are a part of the crony group that the ECB and all other central banks belong to and most likely are feeling the pressure to NOT trigger a credit event. However if they dont trigger the event they are effectually killing the derivatives markets. At that point anyone who holds CDS or any of the other derivative devices will have to ask them self if the insurance is worth the paper its written on and this could and should create an event in that market. What a great financial world we live in.
As expected in yesterdays EUR/USD commentary the move was down. The problem was it didnt give me a low risk entry and I missed the trade. Oh well you cant catch them all. Today I expect more of the same as the levels around 1.3300 have potential to get tested. However the rumor mill is swirling and it may be a bumpy ride. I will be looking for the stop run above Asian session highs and look for the SM trap to short from. The wild card here is the potential for tape bombs and the proven support level at 1.3370 (yesterdays low)
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Be careful out there and Happy Trading