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Is Final Agreement Imminent?

 February 19, 2012 03:56 PM


While Greece is still awaiting final word from Eurozone officials regarding the next installment of bailout funds, it is getting closer to seal the deal with private creditors. We have heard this very line for at least three weeks now, but the clock is ticking, so perhaps the latest announcement will materialize. As things stand, Greece would swap as much as EUR 200 billion of sovereign debt between March 8 and March 11, just days before about EUR 14.5 billion bonds mature are due for repayment. Timing here is not coincidental – according to some sources, receiving bailout funds from EU/IMF hinges on reaching agreement with private parties.

The old debt would swapped for new 30-year bonds bearing a coupon of around 3.75%, which could rise if Greece's growth is higher than current forecast. It is still unclear what size of "haircut" (losses) will the bondholders endure, but they will be substantial, at least 50%. For example, the Greek parliament is expected to pass legislation next week that would force some bondholders to take a loss of about 70% of principal. These are the holdout parties, which have rejected previous negotiations. Their holdings are estimated to be between EUR 30 billion and EUR 50 billion, depending on sources. We could assume that those participating in the "voluntary" swap will receive somewhat better terms. More details should emerge on Monday, before or during the Eurozone finance ministers meeting.

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The Euro has been getting stronger last week, but late Friday brought considerable weakness. On the short-term chart, the EUR-USD looks like it wants to correct more. It closed at 1.3138, right at support level. I would like to sell it there, with 30 pips objective, but that will depend on how the price opens. Probably a better opportunity will present itself if the EUR-USD drops to 1.3110. I will be looking for a minor low there, with intentions of selling it on next bearish breakout, targeting 50-60 pips. We shall see how the opening unfolds.

Last week, the Australian Dollar stopped its advance against the CAD. At the moment, the uptrend is still valid; the price is showing a consolidation on the intermediate term chart. This could change in a hurry if the price drops to 1.0640, below the latest minor low. If that happens, the AUD-CAD could easily continue down for another 80+ pips. However, if this consolidation persists, chances of reversal will diminish, favoring a bullish continuation. Gaps at the opening in all currency pairs are always possible, something to consider when looking trading opportunities. Have a great trading week!

Mike K.

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