- Expectations build for a deal – but we’ve been here before
The Eurozone developments over the weekend have raised expectations of a deal from today’s Eurogroup, due to kick off at 3.30pm Brussels time. German Finance Minister Schaeuble’s comments were seen as less combative; and his Austrian counterpart Fekter has added to the optimism, saying that there is little appetite among the majority to abandon Greece. But while a deal appears far more likely than it did in the middle of last week markets have seen to many deals unravel to allow European leaders the benefit of the doubt. Indeed it is clear that many of the implementation concerns that originally prompted last week’s suggestions of a delay until after Greek elections in April still remain; Eurogroup President Juncker spoke of much work to be done over the weekend, while this morning Fekter has once again raised the issue of an escrow account for the disbursement of bailout cash. There are also concerns that the measures under discussion will still not be sufficient to bring the Greek debt-to-GDP ratio down to the 120% level seen as sustainable by the IMF; the ECB is said to be debating whether GGBs held in the portfolio investment accounts of Eurozone national central banks might be subject to a haircut – thereby contributing to Greek debt reduction. But on the assumption that a deal is indeed reached, we still expect the EUR to rally, not just against the USD but indeed across the board, although perhaps to a lesser extent against the risk counters such as the commodity currencies. Against a background of positive US data, further easing from the BoE and BoJ, a RRR cut from the PBoC over the weekend, and ahead of another bumper 3yr LTRO from the ECB next week, the stage would appear to be set for a nice rally in risk. But while the removal of a Greek financial shock is undoubtedly a positive, FX markets have shown remarkable resilience (or complacency) in the face of that threat, suggesting that while a risk rally may indeed materialise, it may not have the legs that these tailwinds would suggest.
- USDJPY rally extends, US CPI helps
JPY was again the weakest G10 currency on Friday. BoJ Governor Shirakawa remarked that a sharp yen rise would have negative impact on the economy though he also admitted there were some benefits from yen strength. Helping the move were higher Treasury yields on higher than expected core US CPI. We have now been stopped out (at 79.25) of our short USDJPY position established last December. Friday’s IMM data revealed a near halving of the speculative net long JPY positions from 55k contracts to 29k (see chart) but subject to what has happened since Tuesday’s CFTC reporting date, neither CTA traders, Japanese retail, real money or hedge funds (cash not options) look to be short yen. A risk-positive outcome to today’s Eurogroup meeting could be the cue for extension of gains.
- AUD longs still very extended, CAD quite neutral – but to stay that way for now
The IMM data also reveals a market slowly building long CAD exposure, but in the scheme of things this market is still quite neutral; in contrast net AUD longs have hardly moved in the past week and remain close to extremes. It may though take an improvement in Canada data flow or deterioration in Australian data to prompt a meaningful shift in preference for AUD over CAD. RBA minutes on Tuesday are unlikely to have impact on AUD given that we have already had the MPS and which suggest the RBA is now parked in neutral barring deterioration in Europe. BoE minutes will also be of limited interest given the QE announcement and subsequent Inflation Report. New Home Sales may be the key US release in the coming week, and in Europe the German Ifo survey.
BNP Paribas