Optimism Remains As The Market Continues To Wait For A Greek Deal

O/N BULLETS

• UK BRC Shop price index up 1.4% y/y in January.
• Bernanke pledges to keep rates low till late 2014 on concerns of weakness in job market
• Japan Current account surplus rose to JPY303.5bn in December, less than expected

USD

USD traded lower yesterday as EUR/USD made year highs on optimism towards Greece; even the news that the meeting between the Greek party leaders was delayed to today did little to hamper risk sentiment overnight. USD/JPY edged higher during the risk-on move as spreads moved in favour of USD. But USD/CHF traded lower largely due EUR strength which saw EUR/USD and to a less extent EUR/CHF higher. With risk sentiment still positive on Greece, the downside bias to USD will likely remain today.

EUR

EUR/USD broke through the 1.3250 level yesterday following news the Greek government were working on a final draft for the bailout agreement. Talks between Greek party leaders were postponed to today, but EUR/USD continued to edge higher. While the market remains optimistic that a deal will be reached, EUR/USD will likely struggle to break higher, as we wait for news from Greece. But with EUR/USD already up two figures since Monday, a good outcome looks largely priced in and the upside could be vulnerable to positive news.

GBP


EUR/GBP edged higher yesterday, as the EUR rallied on optimism towards Greece. After some good numbers from the UK, there have been doubts whether the BoE will announce additional asset purchases at tomorrow's meeting. But market consensus and our economists expect another £50bn of QE; this could see this weigh on GBP performance today. And with Greece nearing an agreement, EUR/GBP will likely continue to edge higher towards the 0.84 level.

CHF


EUR/CHF continued to trade higher yesterday, partly helped by a stronger EUR/USD but largely due to SNB's Jordan's comments. He reiterated the SNB's determination to defend the 1.20 floor in EUR/CHF, and reassured markets the SNB would act at anytime, which would avoid a quick break below the 1.20 floor. He explicitly stated 'the commitment applied at any time, from when market opens in Sydney on Monday to when it close in New York on Friday'.

Spotlight – AUD - NZD 2y rate spread move in favour of AUD – Yesterday's RBA decision to keep rates on hold at 4.25%, against market expectations of a 25bp cut, saw rates move in favour of AUD vs NZD and AUD/NZD edge higher. AUD/NZD had been declining since the start of the year after it diverged from the 2y spread at the end of 2011 (chart below). NZD has been the notable out performer in G10 this year, closely followed by AUD and we still maintain our downside bias to AUD/NZD. The market continues to price in further rate cuts in Australia over the next few months; while the RBNZ have resisted removing the emergency 50bp cut implemented last year so far after some weaker inflation numbers in Q4. This evenings Q4 employment numbers could see some focus, and a good number could move in rate spreads back in favour of NZD