Greece's debt problems on the EU agenda

EU leaders scheduled to meet today in Brussels for a special summit on the economy which is under heavy pressure due to the rising debt concerns in Greece, Portugal and other weaker states in the eurozone. The summit is aimed at restoring confidence among investors who are worried that the debt crisis will undermine a global recovery.

The summit was called in early January and European Central Bank President Jean-Claude Trichet was expected to spend the past two days in Australia to attend meetings with central bankers from the East Asia-Pacific region. Instead, he left early, to make sure he returns in time for the main session of the European summit, prompting speculation over the meaning of his early departure.

The market is considering the possibility that the EU will get the ECB involved and support Greece. Also, there is hope that fiscal concerns that have spread to Spain and Portugal will ease if there is any intervention to help Greece.

Earlier in the week the euro inched up against its major rivals following the news of Mr Trichet's changed travel plans as investors began to think that a policy measure directed at Greece's fiscal situation is potentially in the works. Against the US dollar, the euro regained some strength although still hovering close to its eight-and-a-half month low reached on February 5 at 1.3585, while against sterling and the yen it increased from lows of 0.8667 and 120.70 respectively on the same day.

The EUR/USD has now fallen more than six per cent since mid-December, when news about Greece's debt problems first started to surface. Investors have shifted funds out of riskier assets into safe-haven currencies including the US dollar, yen and Swiss franc, while yields on Greek, Portuguese and Spanish debts have risen sharply.

Elsewhere, last week the Swiss National Bank intervened once again to halt the rise of the Swiss franc. Last Friday, during the early hours of the morning, in a very illiquid market, the SNB intervened as the EUR/CHF approached 1.4550. This new intervention demonstrates the reluctance of the Swiss authorities to allow the currency pair to fall below 1.4600.

From across the Atlantic, we saw a mixed jobs report on Friday last week. The US non-farm payrolls came in at 20,000 job losses for the month of January against expectations for 5,000 job creations, while the unemployment rate fell to 9.7 per cent against an expected 10.1 per cent. However, it is fair to say that the overall trend in US employment sector is still bullish with non-farm payrolls again registering a significant gain from December's 85,000 job losses.

Meanwhile, New York Federal Reserve president Dudley said that the US economy is in "much better shape" than a year ago, but warned that the work is not close to being complete. Mr Dudley continued by saying that smaller US banks, however, are likely to remain under pressure from loan losses "for some time to come". He explained that this means that credit availability to households and small businesses will be restricted.

The focus on the markets will be mainly on today's EU summit. Positive news from the summit could provide the single currency with significant support and a rebound against its major rivals should not be ruled out. However, the trend in EUR/USD still remains bearish and a support package for Greece should not alter this bias significantly in the medium term.

Upcoming FX Key events

Today: US Advance Retail Sales, ECB Publishes Monthly Report.

Tomorrow: German, French and eurozone GDP and Preliminary University of Michigan Sentiment.

FX Technical Key points

EUR/USD is bearish, target 1.3000, key reversal point 1.4800
USD/JP is bullish, target 98, key reversal point 85
GBP/USD is bearish, target 1.5050, key reversal point 1.7000
USD/CHF is bullish, target 1.1000, key reversal point 0.9950
AUD/USD is bearish, target 0.7800, key reversal point 0.9400
NZD/USD is bearish, target 0.6200, key reversal point 0.7650.

Mr Bovay is senior trader at RTFX Ltd.

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