- Greece newsflow positive despite delays; ECB to determine EURs next move
EURUSD has so far failed to make further substantial gains after breaking above technical resistance at 1.3244. While yesterday’s rally in EUR was fuelled by headlines that the Greek government was drafting an agreement on the bailout deal for political leaders to approve on Tuesday, delays to the schedule have continued. The Greek political parties are expected to sign an austerity agreement today, while the Eurogroup meeting (which had already been re-scheduled to today from Monday) will now take later place on Thursday to endorse the second rescue package for Greece. There are more signs of progress, with reports that the ECB is willing to exchange Greek bonds with the EFSF, contributing €5bn to Greek debt reduction. The EUR gained smartly against the USD yesterday but with positioning still likely to be short EUR, a positive outcome to the Greece discussions could risk seeing further unwind of EUR shorts. The ECB meeting tomorrow will, however, be important for whether or not investors continue to cover their short-positions – an indication of aggressive policy easing going forward (we expect at 25bp cut in March) and a lack of a confirmation of the ECB bond-swap arrangement could cause investors to hold on to their short EUR positions and prevent further EUR upside.
- Away from Greece backdrop is becoming increasingly bullish for risk-currencies
Bernanke’s testimony before the Senate Budget Committee yesterday was similar to his testimony before the House Budget Committee. His comment that the decline in the unemployment rate understates the weakness in the labour market supports the argument that the recent pick-up in US data is not enough to prevent QE3 and, ultimately, a weaker USD. We expect San Francisco Fed President Williams to also advocate further QE via MBS purchases in his speech today. This back drop of further easing from the Fed, the ECB and the BoE, while data has also been improving, favours further moves higher in commodity currencies over the medium-to-long term.
- Japan current account surplus smaller, but BoJ removing liquidity
The Japanese current account released this morning showed the smallest surplus in 15 years but confirm that the income account remains more than large enough to offset a (recovering) trade situation. Yen crosses have been bid, reportedly helped by talk of ‘stealth intervention’ bids in the mid-76’s after confirmation yesterday that the MoF had indeed been in on the sly in the days after the October 31 operation, although we give little weight to these operations. For JPY weakness to occur the BoJ would need to ease policy and expand money supply significantly. In contrast the BoJ has been draining liquidity from the market over the past few days. We remain negative on USDJPY and EURJPY.
- EURCHF starting to move higher, may soon gather momentum
EURCHF has moved higher over the past two days following SNB Jordan’s repeat of adamant claims that the EURCHF floor will remain in place in addition to the latest SNB foreign currency reserve data indicating the SNB did not had to intervene in January to avoid a challenge of the 1.20 floor. There has also been speculation of the a move in the floor to
1.22 although we expect this to be unfounded – while Switzerland requires an easing in monetary policy, an adjustment to the floors appears unlikely ahead of an appointment of Hildenbrand’s replacement. Nevertheless, there are many reasons for investors to establish long EURCHF positions, including an expectation of a weakening in CHF if Greek issues can be resolved, and we expect EURCHF to continue to move higher.
BNP Paribas