EURUSD Through 1.34
The recent dollar weakness continued versus risk currencies in Europe. In the absence of major news stories or data releases the stable risk environment remained, with the euro breaking through 1.34 and AUD recovering some of its earlier losses following a Fitch downgraded the ratings of three Australian banks. Earlier, AUD got a modest boost from parliamentary testimony by RBA Governor Stevens who painted a relatively upbeat picture of the economic outlook. Crucially, he stuck to previous guidance and did not suggest the RBA is poised to cut the cash rate. Looking to external risks, Stevens said China is getting on top of its problems around inflation and the property market. However, he sounded more cautious on Europe, noting anxiety over the sovereign debt crisis has not gone away, nor will it for some time. JPY weakness continued versus all G10 currencies, the context of renewed BoJ easing, better US data and a significant rally in crude (given that Japan is a net oil importer) has provided a bearish backdrop. With approval in principle now granted for a new Greek aid program, and FX volatilities at multi-year lows, conditions look right for investors to add to risk positions for another week or so – especially in the run-up to the ECB’s LTRO on Feb. 29. However, we recommend staying nimble given questions remain over how smoothly the PSI transaction will proceed, especially now that a credit event seems increasingly likely. Also we remain on guard for ratings actions over the coming weeks in response to the ECB’s acquisition of de facto super-senior status. Overnight EURUSD traded in a 1.3316-1.3419 range, USDJPY 79.86-80.65.
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UBS Investment Bank