- Big day for the Euro – Eurogroup meeting and ECB to dominate
The pace of the Greek saga is finally heating up as deadlines and schedules compress. Greek political leaders met late into the night saying there was no option but to come to agreement ahead of FinMin Venizelos’ early morning departure to attend an emergency Eurogroup summit, called to endorse the second Greek rescue package. Almost inevitably this deadline was breached – Venizelos left for Brussels without a full agreement, the party leaders failing to reach a consensus on pension cuts. The leaders will however continue their talks in the hope of a breakthrough before the Eurogroup meeting begins at 6pm CET. EURUSD has ebbed and flowed with the will-they-won’t-they headlines, but the market dynamics seem increasingly clear: resolution should see the EUR rally against the USD, and to a lesser extent on the risk crosses – we think a target of up to 1.35 may be achievable. Greek theatrics aside, the market will focus on the ECB meeting. The case for another rate cut is strong as credit conditions tightened further and many economies within the Eurozone entered recession. But it seems that there is some reluctance among some members of the ECB governing council to ease monetary conditions further at this stage. Our economists do not rule out the chance of a cut today, but the odds are in favour of a wait-and-see stance delivering a cut at the March meeting, when the new staff forecasts are published. The ECB meeting will help investors determine whether or not they should continue to cover their short-positions: signals of more aggressive policy easing to come could encourage investors to hold onto their short EUR positions, thus limiting further EUR upside. The Q&A will be crucial as the ECB has yet comment on its participation in the Greek debt restructuring. Also, we will learn whether or not the European national central banks will extend the pool of eligible collateral for the 29 February 3-yr LTRO. The potential for broadening eligible collateral argues for strong demand for the LTRO – in turn arguing for relative EUR underperformance once the knee-jerk reaction to any Greek relief is over.
- China CPI surprises to the upside – but market shrugs it off
Chinese inflation surprised to the upside at 4.5% YoY against expectations for a further fall to 4.0%. While this complicates the delivery of further cuts in the RRR – and perhaps even explains why one was not already delivered – the jump is seen as temporary, the result of food price increases ahead of the holiday. AUD came under immediate pressure but a rebound in Shanghai equities has provided support. In any case, a green light for risk-taking from a Greek resolution should lead to a liquidity-fuelled rally in a market underweight risk – where the niceties of economic fundamentals will count for less.
- Bank of England to announce more asset purchases – we favour GBP 75bn
While UK PMIs exceeded expectations in January, we expect the Bank of England to announce yet another round of asset purchases today, as indicated by the last set of BoE Minutes. The cases for an extra GBP 50bn or 75bn are finely balanced, but we prefer to err on the side of more than less at this point in the recovery of the UK economy. Nevertheless, we expect GBP to remain relatively unscathed for two reasons: first, the market is already expecting it and second, GBP has benefited from the recent European stress as private investors increase their holdings of gilts. As the situation in Greece stabilises, GBP support from safe haven inflows may fade. But we expect GBP strength to resume against EUR as ECB easing is expected to be much more aggressive.
BNP Paribas