Should Euro Rise or Fall on Greek Deal? [HEAT]

The market wants to celebrate the Greek bailout deal as a Euro positive, but isn’t there also a Euro-bearish case to be made in the wake of this deal as well? Also, USDJPY pushing at key resistance.

BoE raises asset purchased £50 billion
The UK’s BoE “only” raised its asset purchase target by GBP 50 billion, which was widely expected, though there were a number of holdouts looking for another 75 billion increase. The accompanying statement was rather dovish, as it should be when a central bank is monetizing debt. The bank issued a statement today bemoaning the risks of a “significant margin of economic slack” that is “likely to persist” in the nearer term, though it did express some hope that the conditions would brighten “later this year.” Inflation is expected to “fall sharply” in the near term. Initially, the pound took the decision as relatively good news as the minority looking for a larger asset purchase target were disappointed, and EURGBP fell sharply from a try at the top side of the range above 0.8400 on the positive news flow on the day.

Yesterday we asked what could slow the rise in the “turbo-kiwi”, which has vastly outrun its fundamental support in many crosses and is clearly running on the fuel of capital flows and the theme of “risk on” due to generous liquidity conditions – especially for high-rated countries with solid sovereign balance sheets. The candlestick for yesterday looked a bit “reversal ish”, but there was no real follow through lower today and the employment data released last night was relatively supportive, even if it looked better on the headline than it actually was – Q4 unemployment dropped all the way to 6.3%, but much of this was from a drop in the participation rate rather than due to an advance in payrolls. I’d still be on the lookout for momentum to roll over at some point, with the elevated Chinese inflation data possibly moving forward the roll-over risk for the Antipodeans (NZD and AUD) as it at least delays the prospects for Chinese stimulus to boost export activity.

So much for pop in Swedish housing bubble?
The Swedish housing prices leapt close to an all-time high in Dec., though this appears to be a seasonal pattern, with January as the normal peak month for price (no explanation as to why this might be). This December data dramatically shifts the momentum as previous months seemed to be showing more softness in house prices. This is a merely a delay of the inevitable for Sweden’s housing market, however, as the price trends were long ago identifiable as a bubble, and were driven unsustainably higher by the policy response to the global financial crisis.

Supportive UK data
A couple of strong data points out of the UK today – first in the form of a solid Manufacturing Production report for December and second, a remarkable improvement in the nation’s trade balance in Dec, to a stunning -£7.1B vs. -8.6B expected and -£8.9B in November. The total trade deficit (vs. the more widely followed Visible trade balance figures just mentioned) was actually the smallest since 2003. But as Nick Beecroft suggests, this could be mostly due to weak consumption as the better terms of trade were mostly a result of falling imports.

The Euro and the ECB
As we are writing this, there are reports of a deal on Greece being signed that sent EUR/USD back toward 1.3300 again after earlier in the day the EURUSD had both attained that level and sold off sharply from it – only to sell off again as strong US data was released and Draghi was out speaking.

Draghi is out reading the ECB statement and pontificating about the ECB outlook as I am writing this – the view of inflation remains “broadly balanced” and Draghi noted that the latest surveys confirm tentative signs of stabilization, though there are still “downside risks”. On the policy side, besides keeping interest rates unchanged, Draghi tweaked collateral rules to include credit claims, no doubt to open up another loophole for banks to access liquidity as we near the end of the month LTRO.

Draghi refused to comment on how the ECB holdings of Greek debt will be treated (there were rumours that they would be offloaded to the EFSF) though he did confirm that a Greek deal had been reached. He also said in the press conference that a change to the interest rate was not even discussed – a nominally Euro positive development.

One way to look at the Greece deal and the model it could provide going forward for Euro crosses after possible initial enthusiasm (and even that enthusiasm has been erratically expressed today): it can be considered Euro negative because the assumption becomes that the main EU powers, despite their reluctance to show how much they want to commit to a closer union, effectively DO remain committed and will need to support ECB efforts, covertly or overtly to print enough money to keep the awkward kludge of a European Union a running concern. This means maintaining very easy ECB policy and expansion of its balance sheet as the next country gets into trouble and then the next one.., etc. Of course, as long as the global risk asset rally remains on, it appears that the USD and the JPY will be the weakest two currencies (with the JPY the caboose of the G10 as long as government bonds are weak.).

Looking ahead
EUR/USD technicals are at an important inflection point in the very near term – the pair needs to maintain the 1.3200/40 zone as support to keep the rally going from here (tested twice today) and scratching around for reasons to support this rally is a difficult task –only positioning and the default logic that the continued rally in risk assets will prove USD detrimental come to mind. (And if risk does turn tail, as we suggested yesterday, the highest beta pairs will be the likes of AUDUSD and NZDUSD, certainly not EURUSD, as EURAUD and EURNZD would likely rise sharply given the high-flying rally in the Antipodeans that has been driven by the latest swell in the carry trade.

We had more strong claims data out of the US today, which pressured bonds once again and thus pressured JPY crosses higher. The brief reversal yesterday in USDJPY was in turn reversed and the pair pushed close to the daily Ichimoku cloud and 55-day moving average as of this writing – let’s see whether it can close well within the cloud today or follow through tomorrow. The pair still needs to take out the 78.30 resistance to get anything going structurally, and, for example, US treasuries remain mired in a range and need to break out lower (higher yields) as well to provide a confirming indicator unless the Japanese MoF wants to force things with intervention.