And Now It’s Portugal

On Monday, the yield on the 5-year Portuguese note spiked. The yield hit a record for the post-euro era of 22.69%. The trade may have been fueled by the turn of events in Greece. The general perception of the market may be to accept Greece’s default as a given.
Last year, markets appeared frightened by the prospect of a Greek default, but various commentators have begun to talk-down the event. Perhaps most interesting was JP Morgan Chase’s (NYSE: JPM) CEO Jamie Dimon characterizing the net effect of a Greek default on US financials as being practically nothing.
Greece’s overall debt is a relatively paltry sum when seen from a global perspective. Still, the turn of events in Portugal may have given credence to what market bears have been warning of: a contagion effect.
There had been plans for a deal to allow Greece to take a “voluntary” haircut of 50%.
Yet, some creditors resisted the deal (perhaps hoping to use credit default swaps to profit—these instruments wouldn’t payout in the event of the default being voluntary) and there was talk that Greece would need to increase the haircut further to better get the growth rate of its debt under control.

FOREX NEWS - Euro off highs ahead of Portugal debt sale

* Single currency still seen vulnerable as event risks loom

* Greece debt swap talks due to resume on Wednesday

By Ian Chua

SYDNEY, Jan 18 (Reuters) - The euro clung on to most of its overnight gains in Asia on Wednesday but came off its peak after disappointing earnings from Citigroup took the shine off a batch of upbeat data from China, Germany and the United States.

The single currency stood at $1.2739, having climbed more than 1 percent at one stage overnight to a high of $1.2808, pulling well away from a 17-month trough around $1.2623 set on Friday.

Resistance is seen around $1.2800, the 14-day moving average and around $1.2850 the top-side of a downtrend channel from November. Against the yen, the euro was at 97.84, off an 11-year low near 97.00 plumbed on Monday.

"In the immediate term, risks may arise from the Portuguese bill auctions later today and the Spanish long term bond auctions on Thursday," BNP Paribas analysts wrote in a client note.

"With the situation on Greece extremely fluid, recent euro gains on the crosses may potentially turn, leaving euro once again vulnerable to further downside," they added.

Portugal aims to sell up to 2.5 billion euros of treasury bills later on Wednesday in its biggest debt auction since last year's bailout.

Germany is looking to raise around 4 billion euros in the bond market on Wednesday, followed by Spain and France on Thursday.

Greece's debt swap talks with international creditors are also set to resume on Wednesday. A deal is needed to secure a new bailout from the EU and IMF and avoid a messy default when a big bond redemption comes due in late March.

The better tone in the euro saw the dollar index fall 0.5 percent to 81.117, retreating from a 16-month peak of 81.784 hit on Friday. On the yen, the greenback briefly dipped to around 76.54, lows not seen since the massive intervention in October. It has since recovered to 76.82.

Commodity currencies also fared well overnight with the Australian dollar rising to its highest level in 11 weeks against the greenback. It hit a high of $1.0450, before losing a bit of steam to last trade at $1.0371.

Risk sentiment was boosted on Tuesday after Chinese growth data eased fears of a hard landing. In Germany, a report showed analyst and investor sentiment posted a record rise in January, while a gauge of manufacturing in New York State showed growth picked up in January, rising to the highest level in nine months.

But a steep drop in Citigroup's profit tempered some of the newfound optimism. Goldman Sachs Group, Morgan Stanley are among major financial firms due to report their results this week.

© Thomson Reuters 2011. All rights reserved.

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