Yesterday left us none the wiser on the direction the Greece/Troika negotiations will take us, but the market refused to sustain its fear level on the Greece issue. Greek yields calmed back down and the euro squeezed back higher against the US dollar in sympathy with other USD pairs.
The headline risks for euro will continue for weeks, though the European Central Bank’s recent action accelerates the timetable as some deal will need to be struck at least before the end of this month, and possibly sooner, as the ECB will carry out an ELA (the liquidity programmed keeping the Greek financial system alive) review on February 18-19.
Note that French president François Hollande and German chancellor Angela Merkel are in Moscow today after visiting Ukraine yesterday. Hollande proclaimed yesterday that he thought Ukraine did not belong in NATO and that he hoped that he and Merkel would be able to reach agreement on a comprehensive peace settlement over Ukraine. Judging from yesterday’s market reactionto this news, it is investing significant hope that this trip will amount to something.
Meanwhile, Ukraine floated its currency, the hryvnia, yesterday, and it promptly lost around a third of its value. Watch for headlines today and over the weekend. Merkel and Hollande returning home with nothing together with a headline or two about Vladimir Putin not being in touch with reality (Merkel has said similar in the past) over the weekend could present a gap risk for markets on Monday’s open.
RBA not so dovish?
The AUD squeezed back a bit higher after the Reserve Bank of Australia policy statement proved less dovish than the market was pricing in after the RBA surprised with its recent cut. The GDP forecasts were only lowered 0.25% for 2015 and not at all for 2016, while core inflation was also only lowered about 25 basis points, but expected to remain above 2.0%.
If we believe the RBA has significant forecasting powers, then this is RBA bullish, but the last time I checked, no central bank ever forecast anything correctly and the backdrop remains AUD bearish. Sure, AUDUSD could squeeze through near-term resistance at 0.7850, particularly on a weak US payrolls number, but still looking to fade strength as long as we remain below 0.8000/50.
Chart: GBPUSD
GBP has been the most aggressive currency in squeezing higher versus the USD as the 1.5250 resistance area was taken out yesterday. Today’s action will be about confirming or rejecting this move, depending on the strength of the US employment report. To the upside, the zone has opened up toward 1.5500/50 if we see a weak report and the USD finds itself under further pressure. 
G-10 rundown
USD: On the back foot ahead of nonfarm payrolls today, with two-way surprise potential, though great reaction potential, perhaps, on a strong number, particularly if we see +300k.
EUR: Market tiring of Greece headline risks – remember the backdrop of massive QE on the way, which was the original story. 1.1500 is the important resistance level for EURUSD.
JPY: Will Japanese yen traders please stand up today? If we’re to get a view on USDJPY, today is the day. Japanese bond yields have been backing up sharply over the last couple of weeks, a development that has largely escaped notice but could be a sign of strain. Stay tuned.
GBP: GBPUSD has broken free of resistance, but we haven’t seen the US data yet – so two way risk there remains. Today’s UK Trade balance numbers a monthly reminder of the scary UK structural backdrop that the market has been ignoring for far too long.
CHF: Moving back and forth on the news related to Greece and the sudden introduction of Hollande’s speech on Ukraine and Russia. Gap risk potential over the weekend, particularly if Hollande and Merkel return home from Moscow in disgust and empty handed.
AUD: The RBA less dovish in its policy statement than expected, but not looking for the bid to be sustained for long. 0.7850 is a critical level tactically in AUDUSD, followed by the structurally critical 0.8000/50 zone.
CAD: More strength on a comeback in the oil market 1.2400 is an important support in USDCAD and 1.2600 is resistance. Interest rates suggest risk remains to the upside in USDCAD, though the US employment report and direction of oil price are wildcard short-term risks.
NZD: Watching 0.7450 in NZDUSD for whether the squeeze extends - structurally important to stay below the 0.7600 level if we don't sell-off again immediately in the wake of today's US employment report. In AUDNZD, 1.0500 looks like an important support/pivot zone.
SEK: Remaining on the back foot as we watch what the Riksbank will have to say next week. Range looks like 9.38-9.50 for now.
NOK: Looking very weak, given that we hardly saw a rally despite the strong crude oil rally. Still on the lookout for EURNOK to pull higher.
Renewed tensions in Ukraine are threatening markets. Photo: iStock
Looking ahead
Next week offers few event risks of note, with the most interesting being the Riksbank meeting on Wednesday, where the market is wondering whether the Riksbank is ready to take the plunge into non-conventional policy and if so, what the mix of tools will be.
On Thursday, we have the quarterly Bank of England inflation report, typically the premier chance for the BoE to offer its view on the UK economy and the anticipated trajectory of policy. The lone US economic data point of interest next week will be Thursday’s US retail sales data for January.
It’s not on the calendar just yet, but US Fed chair Janet Yellen’s semi-annual testimony before Congress is likely set for the week after next and if there is a mismatch in market expectations versus the Fed’s own attempts to communicate policy, this will be the venue for Yellen to make her stance known.
Economic Data Highlights
- Australia Jan. AiG Performance of Construction Index out at 45.9 vs. 44.4 in Dec.
- Germany Dec. Industrial Production out at +0.1% MoM and -0.7% YoY vs. +0.4%/-0.3% expected, respectively, and vs. -0.3% YoY in Nov.
Upcoming Economic Calendar Highlights (all times GMT)
- Sweden Jan. Average House Prices (0830)
- Eurozone ECB’s Nouy to Speak (0830)
- Norway Dec. Industrial Product Manufacturing (0900)
- UK Dec. Visible Trade Balance (0930)
- Canada Dec. Building Permits (1330)
- US Jan. Change in Nonfarm Payrolls (1330)
- US Jan. Unemployment Rate (1330)
- US Jan. Average Hourly Earnings and Average Weekly Hours (1330)
- Canada Jan. Unemployment Rate (1330)
- Canada Jan. Net Change in Employment (1330)
- US Fed’s Lockhart to Speak (1745)