- FX trading risk-off today on yesterday’s Greek disappointment
FX markets are trading a classic risk-off theme this morning given yesterday’s slip back in progress on Greece. The USD is bid across the board (barring GBP), and the EUR is stronger vs. high-beta/yield (AUD, NZD, and SEK) but softer against the relative lower yielders (USD, GBP and JPY). The failure to agree a deal on Greece yesterday was a disappointment, but surprisingly EURUSD has held in well, given extended short positioning and with much of the bad news already in the price. While markets will trade risk-off today, in the background we still think there is a decent chance for the factors to come together next week (more below) which has the potential for the EURUSD rally to extend, quite possibly to the 1.35 area.
- But underlying factors for Greek deal still close at hand
Despite yesterday’s disappointing Euro group meeting, we continue to remain constructive which suggests looking for better levels to enter the pro-risk rally into next week. An agreement for a 2nd Greek bailout appears now more a matter of formalities ahead of next Wednesdays newly set Eurogroup meeting. Reports suggest the Greek government (with support of all 3 coalition parties) has agreed to austerity/reform conditions acceptable to the troika. Ratification by parliament and a last-minute scramble (for another EUR 325m in budget cuts) are the next steps. The only missing factor now in the jigsaw puzzle is the issue of public sector participation (whether ECB gives up profits on Greek bonds). On this, ECB Draghi yesterday appeared to signal a willingness to accept a ‘no profit, no loss’ deal that would see their Greek holdings transferred back to the EFSF prior to a PSI deal being concluded. The latter is likely to include the insertion then activation of CACs that will make the bond swap coercive for some and likely to trigger CDS. However, we think the triggering of CDS will have limited impact on FX itself given our credit strategy team think much of this is priced in.
- Swiss inflation underscores commitment to EURCHF Floor
Today’s Swiss Jan CPI (-0.8% y/y as expected vs. -0.7% in Dec) saw a muted reaction in CHF. However, it only serves to underscore the SNB’s commitment to 1.20 EURCHF floor. Remember, the floor is one of the few monetary policy tools left for the SNB to fight deflation. The SNB mandate is to ensure price stability (also mindful of business cycle considerations) and this is defined as CPI of less than 2%. But the SNB continues to forecast deflation this year 2012 and inflation of only half the mandate in 2013. This in itself suggests the SNB will fight hard to defend the floor in the months ahead. History tells us the same thing; the experience of SNB DEMCHF floor in 1979 saw the SNB abandon the floor only after inflation spiked up sharply (see Chart).
- Fade the AUD sell-off on China Jan imports collapse; largely a seasonal aberration
AUDUSD traded through stops above the 1.07 level assisted by short-covering in EURAUD. Th trigger was a slightly dovish RBA SMP and collapsing Chinese imports. However for now we see no reason to view the correction as anything more than healthy. Note that base effects/ seasonality had much to do with this; as per data providers, after seasonal adjustment, exports gained 10.3% y/y while imports rose 1.5% y/y. We remain long-term AUD bulls – and indeed USD bears. With US mutual funds still heavily underweight foreign assets, we continue to expect good economic news to be associated with USD weakness as some of the cash being put to work leaks abroad. See our FX weekly for more details.
BNP Paribas