Already under pressure late yesterday, the EURUSD squeeze deflated entirely in the wake of the announcement from the European Central Bank that it would no longer allow the use of Greek bonds as collateral.
This has no immediate liquidity implications for Greek banks as they can continue to access the ECB’s ELA for liquidity, though the message is loud and clear and raises the temperature of the situation dramatically. We can infer that Draghi was not impressed with the stance from Greek’s new Finance Minister Yanis Varoufakis after their meeting late yesterday. One can imagine there was a clash of very large egos and that Draghi didn’t like the Varoufakis swagger, or could we even say braggadocio?
Today will be about whether this new twist leads to a broader risk-off sentiment across the EU periphery and really, across markets generally, or whether the market realises that nothing is known until we get a sense of where the political side of the negotiations will bring. This is a test of market sentiment.
So far, there seems to be little additional panic this morning as Greek 10-year yields are trading only about 40-50 basis points higher this morning (after a 200-basis point drop from yesterday’s highs) and peripheral spreads are generally several basis points wider, but let’s see.
In any case, it is easy to say that the market is at extreme risk of ad hoc developments and headlines after the Wednesday squeeze higher in euro was set off by German chancellor Angela Merkel’s pronouncement that negotiations on Greek funding would go on for months and then yesterday’s swoon came on the ECB announcement. Choppy trading will be the norm.
Elsewhere, there’s not a lot to write home about, as the USD picture remains muddled and uncertain until we get tomorrow’s employment report out of the way. We have a Bank of England meeting today, but with the first BoE rate hike not fully priced in until early 2016, it will be about studying meeting minutes after the fact since the BoE normally issues no policy statement.
Chart: EURUSD
Technically, this EURUSD reversal in EURUSD looks quite ugly and puts the focus back lower, though both the rally and the reversal were triggered by ad hoc headlines, so we’re not in a very technical market at the moment. Still, I prefer to keep the focus lower as long as we remain below the 1.1400 level. 
G10 rundown
USD: Not making any strong impression, broadly speaking, as the focus is on the euro and the risk implications of this latest situation in Greece. We’ll need to see tomorrow’s employment report to get a strong impression of the greenback’s status. A strong US jobless claims number today would be an interesting short term sentiment test after last week’s very strong reading. It seems the market is less prepared for strong US data than weak US data.
EUR: We’re clearly in a very “ad hoc” and emotional phase for the euro – but for the nearest term, the latest developments hardly seem supportive and we have a smart technical reversal lower, so the preference is to look for a follow through lower in the nearest term towards perhaps 1.1200 as long as we trade below 1.1400.
JPY: A bit stronger on the risk-off move after the ECB announced its new stance on Greek bonds, but USDJPY remains stuck in a tight zone and yielding no clue.
GBP: A Bank of England meeting? It’s easy to forget that these are even occurring as the BoE issues no statements and the market has pushed the anticipated first rate hike so far over the horizon that it is hardly worth discussing. GBPUSD faded at the key 1.5250/75 resistance zone, as the focus is on EURGBP downside, even before the ECB’s announcement about Greek debt.
CHF: EURCHF back lower under the important 1.0500 area due to the stampede to get out of euros on the ECB announcement. The risk is that we have a rather “non-technical” market as long as we have the ad hoc risk of news headlines impacting sentiment.
AUD: Escaping notice at the moment due to bad news elsewhere, but looking for weakness in AUD again soon. 0.7850 is a critical area for AUDUSD and vulnerable to stop hunting if the USD sentiment is weak in the shortest term, though I don’t expect any rally to stick. The Reserve Bank of Australia policy statement to be released tonight.
CAD: An awful lively PMI yesterday and crude oil sell-off saw USDCAD rallying steeply and would expect the pair to remain supported above 1.2500 until we have a look at the US employment report tomorrow.
NZD: The rate picture remains very NZ supportive, though I continue to look for a reason to sell NZDUSD - perhaps tomorrow’s US jobs report will provide that opportunity.
SEK: Some minor numbers this morning as we look for whether the 9.38 support holds in EURSEK now that the euro has come under fresh pressure. Any big move will likely have to wait for Feb 12 Riksbank meeting, however.
NOK: Weaker again as the crude oil squeeze has faded. That EURNOK can’t even sell-off on the news late yesterday says a lot – looking more intently for a rally now in EURNOK/sell-off in NOK crosses.
The market is more emotional than technical. Photo: iStock
Economic Data Highlights
- Australia Dec. HIA New Home Sales out at -1.9% MoM
- Australia Dec. Retail Sales rose +0.2% MoM and +1.5% QoQ ex inflation, vs. +0.3%/+1.1% expected respectively.
Upcoming Economic Calendar Highlights (all times GMT)
- Sweden Dec. Industrial Production/Orders (0830)
- Eurozone ECB’s Weidmann to Speak (0945)
- Eurozone ECB’s Praet to Speak (1130)
- UK Bank of England Asset Purchase Target/Interest rate announcement (1200)
- US Q4 Nonfarm Productivity/Unit Labor Costs (1330)
- Canada Dec. International Merchandise Trade (1330)
- US Weekly Initial Jobless Claims (11330)
- Australia Jan. AiG Performance of Construction Index (2230)
- Australia RBA Statement on Monetary Policy (0030)