- Eurogroup tomorrow is immediate focus – but Moody’s reminds of longer-term problems
Relief over Greece’s ratification of the austerity measures kept markets on firm footing Monday, and attention now turns to tomorrow’s Eurogroup meeting. We expect the formal approval of the second EU/IMF loan package, alongside details of the PSI component of the bail-out – and indeed details of the official sector participation. Our rates strategists expect Greece to propose a roughly 70% NPV loss and believe that the only way to achieve near 100% PSI participation is by inserting collective action clauses into existing Greek bonds. Whether or not CDS is triggered is something we will not know for a few weeks, but despite the rocky road still ahead, we still contend that if all elements of the Greek bailout deal do come together, EURUSD can trade up to the 1.35 area. Overnight, however, Moody’s have kindly reminded the market that there is more to the Euro debt crisis than the Greek situation, downgrading Italy, Spain and Portugal and placing the AAA ratings of the UK, France and Austria on negative outlook.
- Bank of Japan unexpectedly eases– USDJPY to test key 78.30 resistance if Shirakawa signals shift of policy
Against analyst expectations, BoJ expanded its asset purchase program by ¥10tr to ¥30tr, and adopted a policy goal of 1% consumer inflation. While this is a disappointing cave-in to political pressure, it can be argued that it puts the ball back in the politicians’ court with minimal impact on monetary policy. At the margin the additional liquidity is negative yen, but in itself is not going to change the long-term trend. But the market will be watching for Governor Shirakawa’s comments at 7:15GMT: if there is a suggestion that the 1% CPI target represents a change of policy by the BoJ – where the additional ¥10tr is just the first instalment on a commitment to ease until CPI hits 1% – then JPY will weaken further. AUD remains the chief beneficiary of global liquidity in the G10 space – in that scenario long AUDJPY is the way to go.
- Portuguese GDP to highlight core/peripheral growth divide; UK inflation to justify last week’s QE from BoE
We expect German ZEW expectations to improve today, potentially leading to a temporary boost for EUR as it adds to suggestions that the Eurozone economy is faring better than perceived a month or two ago. Meanwhile, Portuguese Q4 GDP is of interest (ahead of tomorrow’s French, German and pan-Eurozone estimates); the market expects -1.7%q/q, –
3%y/y, confirmation of tighter austerity measures weighing negatively on internal demand., and reinforcing the divergent paths between the peripheral and core economies. Meanwhile UK CPI today is likely to verify the Bank of England’s view that inflation at the two-year horizon will ‘more likely than not undershoot the 2% target’. While GBP is likely to continue trading with limited reference to BoE balance sheet expansion, the Moody’s action may temper strong foreign demand for gilts and may allow for a break through 0.8400 resistance.
- US retail sales should support risk appetite; Plosser, Lockhart speak
US January retail sales are the main US event. We expect +0.9%m/m, much in line with expectations, and though led by autos we expect the ex-autos number to print a reasonably healthy +0.4%. This should be risk positive. Overnight the San Francisco Fed’s Williams kept to his dovish message despite the recent upside surprises in US data. He sees inflation below the Fed’s 2% target for the next two years and unemployment well over 7% for several years; he says the Fed must act quickly to minimize economic damage. Ahead of Wednesday’s publication of the latest FOMC minutes more Fedspeak from hawk Plosser and moderate dove Lockhart will be of interest.
BNP Paribas