EUR short covering rally gathers momentum, but SEK and NOK the G10 stars
Thursday ostensibly counts as another positive day for risk, but was hardly convincing in this role, with US equities posting only minor gains into the close. NZD and AUD failed to retrace all of their falls post CPI and employment data respectively, while CAD lost ground despite better than expected manufacturing sales. Allocations into SEK and NOK out of other G10 currencies left these two currencies the biggest gainers on the day. But the main story was the recovery of the EUR, both vs. USD and on most crosses. Solid Spanish and French auctions, and the absence of any negative shocks out of the Eurozone (on the status of Greek PSI talks in particular) were enough to see the squeeze/short covering of euro positions continue. US data was a mixed bag, with housing starts retracing a good chunk of the big November rise; and the Philly Fed
Index fell back to 7.3 from 10.3 in December. CPI came in as expected with core printing +0.1%, but initial claims came in much lower than forecast at 352k, down from a revised 402k last week. Notable earnings announcements were BofA’s better than expected results – one reason for the equity ‘up’ day; after the close Google earnings disappointed but IBM, Intel and Microsoft all beat their street EPS estimates.
Greek debt swap talks ahead of Monday’s EcoFin remain the main focus– watch Portugal if no deal on PSI
The IIF delegation to the Greek bond swap talks in Athens reported ‘progress’ made on Thursday amid ‘productive discussions’ but gave no more details; talks are slated to continue today. Expectations seemingly run high for some sort of outline deal being reached as early as today between Athens and the country’s major (not all) bondholders and ahead of Monday’s euro group meeting. If events validate this view, there is every chance the euro will move higher still. However until and unless the move manages to break the 1.3250 area (38.2% retracement of the October-January sell-off) the view remains that this is nothing more than a bear market rally. Meanwhile, we regard the risk of bad news shocks undermining the rally as high, as discussed in detail in yesterday’s FX Weekly, and continue to recommend insurance against a reversal of risk sentiment by taking advantage of current low volatility levels. Meanwhile, Portuguese 10Y bonds have widened significantly since the beginning of the year, although it’s difficult to apportion the move between the impact of the S&P downgrade and increased fears of Greek contagion. But failure to reach agreement on the Greek PSI deal today will have markets looking nervously at Portugal, wondering whether a coercive Greek haircut is the template – despite European leaders’ insistence that Greece is a ‘special case.’ This may focus some attention on the central bank’s monthly economic indicators report (13:00GMT), but a more likely reaction might be to sell first and ask questions later.
Fiscal Compact drafts to be parsed; US home sales, Canada CPI, UK retail sales due
Also relevant on Friday will be wording of the new Fiscal Compact (fresh drafts of which are likely to be in circulation through the day) and where interest will be in whether the relaxation of automatic sanctions objected to by the ECB (in particular the get-out clauses from fresh fiscal rectitude in the event of breaches of fiscal guidelines) has been changed back to the ECB’s likely satisfaction. On the data front, the highlights are Canadian December CPI, US existing home sales and UK retail sales. EURCAD demand bought USDCAD off the lows Thursday and more of the former may mean additional USDCAD gains, especially if CPI proves benign, but we continue to like CAD on a strategic basis. A strong retail sales print (market +0.7% ex-petrol) should be seen in the context of the 0.7% Nov drop and shouldn’t move GBP.
BNP Paribas