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FX traders focus on Eurogroup

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Forex markets remain optimistic following Friday’s solid risk-on close. Asian equity markets open the week on a solid footing. The Nikkei rose 0.51%, Shanghai composite and Hang Seng rose 0.18% and 0.58% respectably. European stock futures suggest a positive open (US markets are closed due to holiday). Risk appetite returned despite the Ukraine-Russia cease-fire agreement lasting only a few hours (idealists point to the limited conflict zone).

USD continues its retreat, driven partially by weak University of Michigan consumer climate index which indicated that the demand side of the US recovery is not as strong as originally perceived. EURUSD gained marginally on positive comments from the weekend talks between Greece’s finance and foreign ministries and technical delegations from the European Commission, ECB and IMF. EURUSD rose to 1.1426 before shifting into a sideways consolidation pattern. The weekend talks were focused on clearing areas of disagreement rather the hammering out technical details. This constructive approach seems to have set the stage for today’s Eurogroup discussion. Markets are expecting an agreement that would enable an extension of the program for a few months or allow Greece to issue additional short-term debt. Either solution would permit the European strategy to “kick the can” down the road to reduce uncertainty.

Data from Japan showed that GDP grew 0.6% q/q in Q4 2014 (annualized 4Q growth was 2.2% lower than 3.7% expected) below the markets expectations to expand 0.9%. In addition, the prior contraction was revised downwards to 0.6% from 0.5% previously. Weakness came from private consumption and business spending. The faltering growth data indicates that Abe and BoJ will have to do more, including supplementary easing. Nikkei hit an 8-year high on the weak data , and the JPY was marginally supported against the USD supported by US yields.

Luc Luyet, CIIA – Senior Market Analyst: “Japan 4Q GDP moved back to positive territory (+0.6%qoq) but was less than expected (0.9%). Private consumption and business spending were much weaker than expected and highlight the Japanese problem to lift consumer spending. As households continue to expect weak inflation, the urge to spend in order to alleviate the erosion of their savings is hampered. Without improving sales outlook, corporates are not investing, cementing a low growth low inflation environment. As the BoJ’s QQE is increasingly seen as unable to lift inflation on its own, structural reforms to boost Japanese growth potential is more needed than ever.”

Other data from Asian sessions, New Zealand’s real retail sales rose 1.7% q/q above the median forecast rise of 1.3%, and fasts pace since 2.5 years. China’s foreign direct investments jumped by $13.92bn in January. Australia’s new motor vehicle sales dropped 1.5% m/m in January against the revised lower increase of 2.6% in December.

CHF is marginally stronger today as SNB sight deposits data suggests that the central bank has not been actively intervening in the FX markets. Sight deposit data for the week ending Feb 13th came in at chf384.920bn verses chf384.88bn for the week ending Feb 6th , the increase being trivial. The rise is more likely to be a function of normal banking transitions rather than the SNB actively pursuing policy actions. While the central bank clearly would likely a weaker CHF they are content not to interfere and aggressively drive the CHF lower. This also lessens speculation that the SNB would look to keep CHF in a managed band. The lower threat of SNB action will allow EURCHF to trade back towards 1.6000 and USDCHF 0.9288.

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