Markets focusing on the positive and seemingly ignoring Greek event risks…for now
Risk in FX markets has continued to edge higher as the markets seems to focus on the positives out of Europe, with a successful Portuguese bills auction and news that the IMF will attempt to increase its lending capacity carrying the day. But IMF funding is a political and diplomatic minefield: the US Treasury has again denied any intention to seek additional resources for the IMF, raising issues of how contributions from the likes of Japan and the BRICs can be managed without trampling on established quotas. Meanwhile, Bundesbank head Weidmann said that he sees exceptional risks to the eurozone economic outlook and reiterated his opposition to ECB unlimited bond buying. But the main driver for markets in shaping sentiment remains Greek PSI negotiations. Negotiations seem to be centering around a proposal that would see a haircut of 68%, but the level of holdouts remains a big sticking point: Greek PM Papademos continues to threaten legislation to force acceptance if necessary. But while we may still get a ‘voluntary’ exchange, the risk is that participants will need to peer over the edge of the cliff to agree to it, suggesting continued vulnerability for EUR – but also for risk in general. Greece aside, the focus for today will be on the Spanish and French bond auctions, post S&P downgrade. Out of the US, headline CPI should come in flat given the decline in energy prices; however, core inflation should edge lower due to deep discounts from retailers. Also we expect the Philly Fed index to improve, solidifying the markets’ relatively positive outlook on the US
economy – especially since it indicates that the ISM remains firm given its strong correlation.
Australian labour market data disappointing – RBA cut increasingly nailed on
This morning’s Australian labour market data disappointed sharply, showing a loss of 29,300 jobs in December against expectations for a 10k add. While there were some minor positives in the full-time/part-time split, the report will do nothing to dissuade the RBA from another ‘insurance cut’ at its February meeting. Clearly positioning at this stage says that the risk is to the downside – AUDUSD has struggled to rally even as risk-on elsewhere has pushed it thru the key 200 dMA -suggesting some measure of fatigue. And we continue to see FX markets as somewhat complacent in the pricing of risks out of Europe: we recommend long AUD vol strategies and/or buying AUD puts as a hedge.
Nowotny warning Japan off intervention?
In parliament this morning Japanese FinMin Azumi warned that he will take decisive steps on excessive fx moves. But after thinly-veiled criticism from Geithner last week, the ECB’s Nowotny has said that while he “understands Japanese concern about the weak EUR, it is premature to say that EUR moves have been one-sided.” For now there seems little threat: USDJPY is holding up well and with the evaporation of the trade surplus and with offshore specs already very long, the likelihood is that semi-official support will be sufficient to keep it there. EURJPY poses a bigger problem: if EURUSD drifts lower, does the MoF attempt to halt the slide in EURUSD all by itself? We think not – unless the move is in the context of a significant shift in risk sentiment.
BNP Paribas