Posted on February 5, 2015 by the XM Investment Research Desk at 8:19 am GMT
The euro fell broadly after late in the US session the previous day, the ECB announced that Greek bonds were no longer accepted as collateral for regular refinancing operations. Greek bonds would however be accepted for purposes of Emergency Liquidity Assistance (ELA), for which a higher interest rate is levied and goes on the balance sheet of the national central bank. The move was a negative surprise, as such a move by the ECB was not scheduled before the end of February and many analysts foresaw an extension that would facilitate negotiations between Greece and its lenders. The move came after the Greek Finance Minister Yanis Varoufakis met with ECB President Mario Draghi and the meeting did not go well judging by the ECB decision a few hours after the two men met.
The euro did manage to hold on to the 1.13 level however, while risk sentiment turned sour. No doubt news about Greece will continue to influence markets in the coming months and there will probably be many twists and turns to this story. The euro was also helped by better-than-expected German industrial orders for December released on Thursday.
Oil also crashed by 9% the previous day after a bigger-than-expected increase drove inventories to record highs in the United States. While capital expenditure for new projects has been put on hold in many cases, it will take some time for supply to drop and this was reflected in the oil inventory data. The move drove US crude oil below $50 a barrel once more to around 47.90. The drop in oil hurt risk sentiment as well as weighing on commodity currencies. The aussie was holding off the low reached earlier in the week (0.7627) to trade at 0.7780 against the greenback.
The US dollar was under pressure against the Japanese yen, falling to 117.23 after dropping to as low as 117.01, but remained within the well-defined ranges of the past 3 weeks.
Helping risk sentiment earlier yesterday was a cut in the percentage of cash that the Bank of China requires banks to hold as reserves. This is part of the efforts of Chinese authorities to provide stimulus to the slowing economy and to address some liquidity concerns due to capital flight.
Looking ahead to the rest of the day, Markit retail PMI numbers for the Eurozone will be followed by a speech from ECB Council Member and Bundesbank Chief Jens Weidmann as well as the ECB’s Peter Praet. The Bank of England will also announce its decision – although no change is expected – and then data out of the US in the form of jobless claims and productivity and labor costs will be released. The market will be looking forward to tomorrow’s US employment report.