FX Daily Planet: Sydney/Asia Open

FX Daily Planet: Sydney/Asia Open

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View for the day

Risk markets surged today in response to headlines that Germany is considering providing assistance to Greece and that broader support from the EU will be considered over the next few days. The EUR, which whipsawed widely in response to conflicting headlines, now stands 1% above the USD and 1.3% higher vs the JPY. Against that backdrop the USD is down sharply vs. high beta FX, anywhere from 1-1.6% lower vs. commodity FX and EM FX in particular. We have outlined in the FX Markets Weekly that four conditions are necessary for stabilising markets: (1) Greece secures a liquidity facility; (2) China achieves a soft landing; (3) US data start to impress; and (4) USD positions move from short to long. Today's headlines suggest that the first condition is close to being met. If European governments deliver on today's reports of bilateral assistance to Greece, and if Europe imposes conditionality akin to an IMF program (targets/timetable for the primary deficit), then EUR/USD will have seen a near-term bottom. Note that EU leaders meet Thursday at 10.15CET, and we would expect details on their decision that day.

We have argued recently that Europe would require a couple of months to agree on assistance for Greece since officials first would want to see implementation of fiscal tightening and evidence that Greece could not finance itself through public bond markets. Today's headlines suggest that Europe may act much more pre-emptively, probably fearing widespread contagion. (So far only Greek outright borrowing rates are high by historical standards.) As Europe moves closer to ring-fencing Greece, bear market hedges make less sense. We therefore take profits on short GBP/USD (2.2%), EUR/CHF (0.6%) and NZD/CHF (0.3%). The current environment is fluid enough that we will look for pullbacks in risky markets to exit remaining shorts in AUD/USD, NZD/USD and AUD/CAD, and longs in USD/NOK, USD/SEK, CHF/NOK and CHF/SEK which are in the red. We would not shift to outright longs in cyclical currencies now since China and US issues remain unresolved. EUR/GBP is worth owning since short covering will drive EUR/USD up while sovereign risk will continue to weaken sterling on the crosses. Roll short GBP/USD into long EUR/GBP at current levels (0.8775).

Tomorrow’s hearing from Chairmen Bernanke has been cancelled due to bad weather conditions, but the testimony will still be published at 10am EST. Although we continue to think that the Fed will leave policy rates unchanged within this year (we expect the Fed to start hiking in 2Q11), Bernanke’s testimony could heighten speculation on early hikes and raise the market volatility as the expectation for Fed’s hikes has been receding recently with a series of weak US figures. Despite this, short-covering in EUR/USD will likely dominate FX markets in the near term, especially since net speculative positions on the IMM have reached record shorts in that currency.

Overnight news

EUR: Officials in Germany report that Germany is considering aid to Greece; European Union economic affairs commissioner says EU can support Greece “in the broad sense of the word”

EUR: European Commission President Barroso said the “solution requires action from the Greek side”.

USD: Tomorrow’s hearing from Chairmen Bernanke has been cancelled due to bad weather conditions, but the testimony will still be published at 10am EST.

USD: Jan NFIB small business optimism (index) comes in at 89.3; Dec wholesale inventories (%m/m) decreased 0.8% (Cons: 0.6)

EUR: Trichet is leaving a meeting of central bankers in Sydney early to attend a European Council meeting.

EUR: Germany’s Dec trade balance slightly below expectation at + EUR 13.5bn vs + EUR 15.0b expected while Dec current account shows marginally higher than expected surplus of + EUR 20.6bn vs + EUR 19.1bn; Germany’s EU harmonized CPI final a 0.1% pt higher at 0.8%oya.

GBP: Jan. RICS house price index rose to 32 from 30 in December, stronger than consensus at 27; BRC January retail sales monitor rose 1.2%oya; Dec trade balance shows wider than expected trade deficit of –GBP 7.3bn vs –GBP 6.7bn expected.

Today’s watchlist (all times GMT; +11hrs for Sydney, +9hrs for Tokyo, -5hrs for New York)

AUD: Feb Westpac consumer conf. (%m/m, sa) @23:30 (JPM: 3.5); Dec housing finance (%m/m, sa) @00:30 (JPM: -5.5, Cons: -5.0)

JPY: Dec machinery orders (%m/m, sa) @23:50 (JPM: 8.0, Cons: 8.0); Jan domestic CGPI (%oya) @23:50 (JPM: -2.3, Cons: -2.3)

Overnight price action

FX: The EUR now stands 1% above the USD and 1.3% higher vs. the JPY; the USD is down sharply vs. high beta FX, anywhere from 1-1.6% lower vs. commodity FX and EM FX in particular.

FX vol: Implied vols are down sharply in short maturities.

Commodities: Oil up 2.5 and gols is up 1%.

Bonds: US yields are higher by 5-8bp across the curve.

Equities: US equities are up 1.5%.

Technical View for the day

The markets see a wild day as the short term retracement and reversal in risk markets continues to develop following last week’s one-way deleveraging trade. While the short term setup argues for additional consolidation amid the current momentum extremes, note that this week’s price action has thus far developed in a corrective manner. In turn, the risk for additional risk-unwind and USD strength remain intact as we continue to hold onto short EUR/USD and GBP/USD positions. As such, we continue to monitor last week’s breakout levels for signs of a whether a deeper short term retracement is underway, or prices are following-through to last week’s trends. Moreover, we see an important test at the 1.3850 and 1.3965 levels for EUR/USD, as the short term downside bias will remain intact against here. In line with the improvement in risk yesterday, the JPY crosses shifted higher while attempting to base from several key support levels that we have highlighted over the past few days. Still, much like the USD view, the key breakdown levels are holding including the 124.40/125.50 levels for EUR/JPY and the 78.90/79.70 pivots for AUD/JPY. While the key support levels have held, a break of these levels is necessary to suggest an improved tone and potential for a deeper short term retracement.

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