Daily Report: Euro Extends Recovery on Greece, France and Spain Auction Eyed

Euro extends recovery against other major currencies on report that Greece is close to a deal with private sector investor on debt swap. An unnamed official said that there could be an agreement by the end of this week. With the deal, private creditors would have the face value of their Greek bonds cut by as much as 50% through swapping existing bonds with ones with longer maturity and lower interest rates. That could help Greece secure loans from EU/IMF and get through the critical date of March 20, which it will face EUR 14.5 bond repayments. Another official also noted that Greece is still considering the so called collective action clause on its bonds if only a minority of bond holders disagree to the deal. Meanwhile, it's also reported that IMF approved its staff to official start discussion with Greece on an expanded bailout. At this point, EUR/USD is still held by near term resistance at 1.2878 while EUR/AUD is also kept well below 1.2446, and thus, there is no indication of near term reversal yet. Though, EUR/JPY's breach of 98/80 resistance is taken as a sign of bottoming and we'll see if the EUR/JPY could lead other pairs higher.

Short term debt sales went well this week in spite of the massive S&P downgrade of Eurozone countries last week. But the real test is in longer term bond auctions. France bond auction will be a main focus today. S&P stripped France of its AAA rating last week and the impact investor confidence after the downgrade would be reflected in today's auction. France is set to sell a maximum of EUR 9.5b including up to EUR 8b of debt maturing in 2014, 2015 and 2016, as well as EUR 1.5b of index-linked bonds maturing in 2016, 2022, 2040. France will need to rise EUR 178b in medium- and long-term bonds this year. Also, Spain will sell a maximum of EUR 4.5b of bonds due in 2016, 2019 and 2022 after its credit rating was downgraded by S&P by two notches.

New Zealand dollar is notably weaker after release of inflation data. CPI unexpectedly fell -0.3% qoq in Q4 versus expectation of 0.4% qoq rise. The lack of inflation pressure leaves room for RBNZ to stand pat for longer time. Meanwhile, there is some speculation that RBNZ could cut rates by 0.25% as seen with over 40% chance in swap prices. On the other hand, Aussie is stuck in range and fails to rally on risk appetite after weak employment data. The job market unexpectedly contract by -29.3k in December while unemployment rate was unchanged at revised 5.2%. According to market pricing, there is more than 80% chance that RBA would cut rates by another 0.25% in February.

China leading indicator rose 0.7% in December, with five of six components contributing to the improvement. It's reported that China is considering to relax capital rules for banks, which include lower risk weighting for lending to small businesses and increasing excess bad loan reserves in risk buffers calculations. That could help PBoC boost lending from larger lenders by a maximum of 5%.

A number of important economic data from US will be released later today, including CPI, new residential construction, jobless claims and Philly Fed survey.