The positive tone to risk appetite is keeping the USD on the back foot and for once FX attention has turned away from events in Greece. Before elaborating further and staying with Greece, it’s worth highlighting that the outcome of Greece’s note auction was reasonably solid, with more debt than anticipated being sold. However, the cost of borrowing for Greece rose compared to the previous auction in January, which means that the Greece will still suffer higher funding costs to roll over debt.
The positive reception to the debt offering was not particularly surprising given that it followed so closely after the EU/IMF loan package announcement but it is difficult to see sentiment for Greece and the EUR for that matter, getting much of a lift. The main positive for the EUR is the fact that market positioning remains very short but EUR/USD is likely to struggle to make much headway above technical resistance around 1.3653.
More interestingly Asian central banks are continuing on the track towards fighting rising inflation pressure and Asian currencies, in particular the SGD, were boosted by the Monetary Authority of Singapore (MAS) decision to revalue its currency. Singapore has moved back to a policy of a “modest and gradual appreciation” of the SGD from a policy of zero appreciation, which obviously implies openness to further FX appreciation in the weeks and months ahead.
The rationale for the decision was clear and as revealed in the strong first quarter Singapore GDP data which revealed a 13.1% annual rise. Stronger growth is fuelling growing inflationary concern and to combat this Singapore’s MAS will allow greater SGD appreciation. The reaction in other Asian currencies was also positive, with markets (quite rightly in my view) that other Asian central banks will be more tolerant of currency strength in their respective currencies.
Moreover, Singapore’s move was pre-emptive, perhaps with one eye on an imminent revaluation in China. The recent easing in tensions between the US and China has if anything increased the likelihood that China revalues its currency, the CNY, sooner rather than later, and most likely before the end of Q2 2010. Whatever the rationale, strengthening inflation pressure across the region, will mean a less FX interventionist stance in Asia, and likely stronger currencies over coming months.