German Chancellor Angela Merkel and Barack Obama met in Washington DC yesterday and the US president agreed to wait on a decision over arming Ukraine with lethal defensive weapons at least until representatives of Germany, France, Ukraine and Russia have tried to negotiate a ceasefire at a meeting in Minsk tomorrow.
Greek 3-year yield closed yesterday at a high for the cycle above 21% as the Greek government shows no signs of climbing down from its promises to end the austerity programme after a major speech from Greece's prime minister, Alexis Tsipras. EU peripheral spreads were marginally wider yesterday on the hubbub, but still totally complacent on contagion risk.
The USD rally on Friday looked very promising, particularly given the strong fundamental support for the rally in the form of Fed Funds futures suggesting much higher anticipation of US Federal Reserve rate hikes moving forward. But the complete lack of follow through yesterday gives significant reason for pause – this USD needs to get back on the rally track immediately and make a show of strength today or else we may be faced with a significant further USD consolidation.
The most troublesome pairs are the commodity dollars, as these have pushed back to important resistance levels versus the USD, so I’m watching 0.7850/75 in AUDUSD, 1.2400 in USDCAD and 0.7450 in NZDUSD to see whether we face a failure of the greenback to tack on to Friday’s rally attempt.
Stories of hopes for Chinese stimulus may be keeping the commodity currencies a bit bid at the moment. My impression is that any Chinese stimulus is aimed at softening China’s landing rather than providing any notable hope for exporters into China. Note the Chinese CPI dropping to a fresh five-year low below 1.0% year-on-year overnight, a strong sign of further pressure on China, as it faces a debt nightmare. The plunge in China’s PPI was also the worst for the cycle since 2009.
The Reserve Bank of New Zealand is looking at new rules related to limiting lending for property investors as it struggles to make its macroprudential framework perform as hoped against a backdrop of rapidly falling inflation.
Chart: USDJPY
Still waiting for follow through higher in USDJPY after Friday’s strong US employment report. 119.25 is the hurdle level to the upside for shifting the focus to 121.85 and even 125.00 eventually. To the downside, a fall below 118.00 would ruin the bulls hopes for now. 
G-10 rundown:
USD: Where is the follow through? It is disquieting that we haven’t seen the greenback adding to Friday’s gains considering the fundamental support from heightened Fed hiking expectations. If the USD doesn’t rally today, we could face a steep correction as fresh positions are washed out and more patient USD bulls also feel the squeeze.
EUR: Hard to see how anything clears up related to Greece, so still prefer to keep the focus on the downside, though a rally above 1.1350/75 today would challenge the bearish view on the downside, the 1.1250/75 zone in EURUSD is the obvious hurdle for shifting the focus down to the cycle lows around 1.1100.
JPY: Did Friday not happen or did it? That is the question as we ponder how USDJPY can possibly sell off when US rates have risen sharply since Friday. The latter is an important indicator and 119.25 is an important resistance level for keeping interest on the top side. 118.00 is the line in the sand.
GBP: Watching the UK manufacturing production release today to see whether GBP keeps the upper hand versus the euro. 1.5200 is the important support in GBPUSD and 0.7400 is the major support in EURGBP.
CHF: EURCHF slipped down through the 1.0450/75 support area yesterday, but this didn’t lead to additional significant declines, though CHF could remain under pressure to appreciate as long as we are in this tense window of uncertainty over Greece.
AUD: Not sure what AUDUSD is doing up at these levels – need a sell-off back through perhaps 0.7750 to put focus on downside.
CAD: Needs to rally and steer clear of the 1.2400 area if we are to keep the focus on the highs for the cycle and an eventual test of the 1.3000 level.
NZD: Continues to push the upside versus the USD, with 0.7450 the obvious focus after testing that level at least three times. Any rally there may be quickly reversed ahead of 0.7600/25. In AUDNZD, the focus remains on whether 1.0500 falls.
SEK: Let’s wait for Thursday’s Riksbank for input. Chart locally a bit bearish after yesterday’s reversal around 9.50.
NOK: Slipping a bit lower within the range as momentum has gone dead – watching oil and today’s CPI release for an input. Still see more upside than downside risk at these levels. Line in the sand to the downside at 200-day moving average around 8.45.
Economic Data Highlights
- UK Jan. BRC Sales like-for-like out at +0.2% YoY vs. +0.5% expected and -0.4% in Dec.
- Australia Jan. NAB Business Conditions out at 2 vs. 2 in Dec.
- Australia Jan. NAB Business Confidence out at 3 vs. 2 in Dec.
- Australia Q4 House Price Index out at +1.9% QoQ and +6.8% YoY vs. +1.8%/+7.1% expected, respectively and vs. +9.0% YoY in Q3.
- China Jan. CPI out at +0.8% YoY vs. +1.0% expected and vs. +1.5% in Dec.
- China Jan. PPI out at -4.3% YoY vs. -3.8% expected and vs. -3.3% in Dec.
Upcoming Economic Calendar Highlights (all times GMT)
- Switzerland Jan. CPI (0810)
- Norway Jan. CPI (0900)
- UK Dec. Industrial and Manufacturing Production (0930)
- US Fed’s Lacker to Speak (1320)
- US Jan. NFIB Small Business Optimism (1400)
- UK Jan. NIESR GDP Estimate (1500)
- New Zealand Jan. Credit Card Spending (2145)
- Australia Feb. Westpac Consumer Confidence (2330)
- Australia Dec. Home Loans (0030)