The euro is driving at full speed towards 1.3000 against the buck, but can the pair break one of the most significant psychological barriers in the FX market? Our concern is that some of the fundamentals behind the rally might quickly unravel.
Firstly, Greek PSI negotiations have a long way to go and Greek finance minister Venizelos has stated that the bulk of discussions need to be completed by Friday at noon (local time), so that any plan can be made public on Monday. Also, even if the IIF and the government reach a deal there is no guarantee that Greece will continue down a path of fiscal reform.
Secondly, the proposition by IMF head Lagarde to boost the fund by a massive EUR 620 billion is great in theory but faces some significant headwinds. The most paramount question being; where are the funds going to come from? Basically, the US and China need to play ball and get out their money clips, but so far neither country has committed to contributing more funds.
Attention in Asia is now shifting to January's HSBC flash manufacturing PMI figure out of China at 13:30 AEST. Previously, the figure came in just below expansion territory at 49 and jump above 50 this month might combine with the current positive risk sentiment to lead a further rally in risk assets. However, recent trade figures highlight the impact that diminishing levels of global demand are having on the Chinese economy, which could flow on to the manufacturing sector and keep the headline figure below 50.
In Australia, traders are awaiting the release of trade prices at 11:30 AEST, which we expect to show that Australia's terms of trade peaked in Q3. Consensus estimates are pointing towards a 0.6% q/q increase in the import price index and a 2.0% q/q decrease in the export price index.
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