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Daily Commentary 12/02/15

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Is there a Greek version of Russian Roulette? Greek Finance Minister Yanis Varoufakis is an economics professor who is a specialist in game theory. I wonder what game he is playing now? Does Greece have its own version of Russian Roulette? The Eurozone finance ministers’ first attempt to deal with Greece’s new demands broke down last night. After six hours of talks, the two sides failed to agree even on how to go forward to resolve the impasse. They left the meeting with no further talks scheduled before another meeting of finance ministers next Monday, which is the deadline for reaching some agreement to extend Greece’s current €172bn bailout program beyond its Feb. 28 expiration. According to the FT, Eurozone officials involved in the talks said that the two sides had agreed on a joint statement that would have held out the chance of reaching a deal. But after the meeting broke up, Varoufakis consulted officials back in Athens and then raised new objections and the statement was scrapped. The disagreement may be over the question of whether they are “extending” the current bailout. Greek PM Tsipras believes he was elected on a mandate not to extend the current bailout and has resolved not to do so under any circumstances, so they have to find some way of reaching an agreement that doesn’t use the word “extend.”

It’s rather incredible to me that the market doesn’t seem to care about this development. At the time of writing, EURUSD is virtually unchanged from where it was 24 hours ago. That makes it actually the best-performing of the G10 currencies against the dollar, which gained against all the others as more Fed officials came out in favour of tightening (AUD in particular, followed by NZD and NOK). Yesterday’s EURUSD range was also unusually narrow at 0.45%, about half the six-month average (0.81%). There is some nervousness about the euro reflected in the options market, where the 25 delta ATM risk reversal for EURUSD has gone further negative, implying increasing demand for euro puts relative to calls. Could it be that the Swiss National Bank is intervening in the spot market to keep the euro from weakening? It does seem like there are supernatural forces operating in this currency pair. Either that, or investors have a lot of faith in the ability of the Eurozone finance ministers to pull a rabbit out of their hat at the last minute. I think they will too, but I’m not sure I’d be willing to put money on it.

More Fed hawks Another couple of Fed officials were heard in favor of hiking rates. Dallas Fed President Fisher said he thought that March was the appropriate time to raise rates, but that he lost the argument. He steps down from the Dallas Fed next month. St. Louis Fed President Bullard said that he’s becoming more confident that inflation will rise to the Fed’s target and the he’d like to hike rates sooner rather than later. This is at least four Fed presidents who have said this week that they want to raise rates this year. That’s a pretty good cross section and confirms the divergence in monetary policy between the US and the rest of the world.

AUD plunges on jobless jump Australia’s unemployment rate unexpectedly jumped to 6.4% in January from 6.1% in December (expected: 6.2%). This confirmed the concerns over the labor market that the Reserve Bank of Australia (RBA) expressed at their last meeting. The market now sees a 67% chance of a rate cut in March, up from 34% at the start of the week. Given the political shenanigans going on in Australia, it may be that the RBA thinks the economy could use more monetary support than would otherwise be the case. I remain bearish AUD.

Today’s highlights: During the European day, the highlight will be the Riksbank monetary policy meeting and the Bank of England quarterly inflation report. At their last meeting, Sweden’s central bank decided to hold the repo rate unchanged at 0% and judged that the repo rate needs to remain at zero until 2H 2016. Following the recent improving fundamentals in the economy towards the end of 2014, including the rise in the monthly CPIF inflation rate in December, the pressure on the Bank to introduce additional measures has lessened. Instead, we believe they are most likely to introduce some macroprudential measures, such as a mortgage cap to avoid over-heating the housing market, and to further postpone the first increase of the repo-rate until the 1H of 2017. Given the market’s expectation that Sweden is next in line to come up with further easing measures, such an outcome would probably cause SEK to strengthen, at least temporarily.

As for the Bank of England, the two policy makers who had been voting for a rate increase last month joined the other members in voting for to keep rates steady, because of the increased risk of prolonged low inflation. The November inflation report warned that inflation was expected to fall below 1%. This time, they might say that inflation could even turn negative over the next couple of months. That could push rate expectations out further and weaken GBP.

Today’s indicators: German final CPI for January is expected to confirm the preliminary reading. Eurozone’s industrial production for December is also coming out.

In the US, headline retail sales for January are forecast to fall at a slower pace from December. The focus however, will be on the core figure as the headline can be distorted by the low oil prices. The forecast is for the figure to rise, a turnaround from the previous month. That could strengthen the dollar a bit. Initial jobless claims for the week ended February 7 are also due out.

Today’s speakers: Beside the Riksbank Governor Stefan Ingves and BoE Governor Mark Carney, ECB Executive Board member Peter Praet, Norges Bank Governor Oeystein Olsen and ECB Vice President Vitor Constancio also speak.

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