Euro: Recoups Losses, But Brinkmanship Tactics Continue

The US dollar is mixed. It is mostly softer against the euro and sterling as yesterday's late gains are pared. It is firmer against the yen and Swiss franc amid cross rate developments.

The focus remains on Greece and its negotiations with the other euro area finance ministers. They apparently rejected a draft proposal put forward by the EC's Juncker and Moscovici that Greece's Varoufakis had agreed. The Eurogroup finance ministers appear to have toughened their stance, refusing further talks unless the Greek government requires an extension of the existing bailout, which it is loath to do.

Even though, the euro is testing the $1.14 area, after having been sold to $1.1320 on the breakdown of negotiations. Resistance is seen in the $1.1420-40 area. Greek bond yields are higher on the day, but off their peaks. The yield on Greece's 3-Year note has risen 120 bp to 18.8%. The 10-Year yields have risen almost 60 bp to 10.25%. Greek stocks turned higher near midday in London, with financials trading more than 2.2% higher, but the gains were not sustained.

While the risk of a Grexit would appear to have risen, the framing of the issue in terms of brinkmanship tactics is important. It means not to expect any compromise until the very last minute. It might not be able to be resolved on the finance minister level though there is likely to be another try. An emergency head of state meeting may ultimately prove necessary though, of course, one is not planned.

That said, we remain wary of lines in the sand and fake deadlines. The current program runs until the end of the month. Greece's need for funds increases in March, but it could survive for a short period of time without a new program in place. Dijsselbloem, the Eurogroup head, argued that yesterday was a deadline. It wasn't. Now he says Greece has until the end of this week. This is the stalemate: The Eurogroup wants Greece to request an extension program to buy time to negotiate a new pact. Greece insists that it will not agree to an extension of the existing program that it campaigned against and won a popular mandate.

There are four other developments today that are noteworthy. First, Sweden, which just last week cut its repo rate below zero and announced it would purchase SEK 10 bln of government bonds, reported CPI figures that, if anything, were a bit better than expected. The headline rate fell 1.1% as expected, but the year-over-year rate improved to -0.2% from -0.3%, which was not expected. The underlying rate, which adjusts for mortgages, actually ticked up to 0.6% from 0.5%. The Riksbank has adjusted the CPI basket and has made some methodological changes involving the calculation of mortgage costs. The euro's gains against the krona on the back of last week's Riksbank move has been nearly retraced in full at SEK 9.50 earlier today.

Second, the UK also reported January inflation data. The headline CPI fell 0.9%, which was a touch more than expected, and the year-over-year rate eased to 0.3% from 0.5%. However, the core rate actually rose to 1.4% from 1.3%, underscoring that the decline in inflation is mostly a function of food and energy. Sterling recorded session highs near $1.5400 after the data. There was little follow through selling after yesterday's outside down day, recorded on the holiday-thinned North American session.

Third, the German ZEW survey showed marked improvement from January and is consistent with the recent string of data showing a re-acceleration of the German economy, and the strong rise of the DAX (year-to-date 10.6%), with record highs posted last week. The measure of the current situation doubled to 45.5 from 22.4. The expectations component rose to 53.0 from 48.4. The consensus forecast is with a larger increase, but expectations are at their highest level since last February.

Fourth, the minutes from the Reserve Bank of Australia's recent meeting were not as dovish as the market expected, and this is helping to lift the Australian dollar. It has been bid back above $0.7800 and is nearing last week's high near $0.7845. The lack of rate guidance has seen the market retreat from regarding a rate cut at the March meeting as nearly a done deal. The implied odds now are closer to 50% rather than 75%.

The North American session features the February Empire Manufacturing survey. The TIC data will be released at the close of the market today. The Fed's Plosser speaks on monetary policy after midday in Philadelphia. Canada reports its international securities transactions and existing home sales. Neither are market movers.