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FX focused on Greece, RBA less dovish

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With no real progress on the Greek insolvency issue risk appetite was subdued. But with the US on holidays the full ability for the markets to react to Greece negotiations was limited. Asia regional equity indices were mixed with the Nikkei falling -0.01% while the Shanghai composite and Hang Seng rose 0.15% and 0.71% respectively. Data from China showed that the average price of new homes in 70 Chinese cities fell in January due to soft demand from home buyers despite policy adjustments to loosen mortgage rules and lower lending rules. European markets are expected to come under selling pressure as Greek-Europe talks collapse according to the latest news flow. In Forex markets, concern on Greece was realized in EUR and JPY trades.

Initially invigorated by remarks from Greek FM Varoufakis that he could approve a draft plan up by EU Commissioner Moscovici with goal to extend the credit agreement, EURUSD rallied to 1.1367. Yet, as news flow reversed earlier optimism, EURUSD fell to 1.1322 and subsequent recovery rally failed to generate meaningful demand (market headline exhaustion). Near term EURUSD support at 1.1320 then 1.1250 should be protected for now, barring a worst case scenario (including “Grexit”), while prices should stay below resistance at 1.1535. JPY tells a similar story of headline driven price action. After staging a mild rally, buyers evacuated USDJPY falling from 118.65 to 118.45. With sentiment bearish around Greece, trading JPY will be brisk with no real positing developing. Stops are located below 118.10 support (61.8% Fibo retracement of the move up from 116.64-120.4).

The clock is now undeniably on the field for Greece. Ekathimerini reported that Greece was told by the EU that it has until Feb 20th to request an extension to the current bailout. At the end of this week, should no deal to extend current bailout program be accepted by Greek policymakers, the ECB’s ELA will likely be closed (decided by a vote within the ECB). It has been stated (although contested) that the government would have capital to run for a few months, however banks will quickly run out of capital, putting the deadline much closer than the market appreciates. Given this scenario, banks would be need to halt expected massive capital flight and capital control would have to be introduced. Markets remain complacent on a Greek deal with experts pricing in a 18-20% chance of no deal. We suspect that with Greece rejecting the last plan, and the current impassive situation between Greece and Europe the likelihood is significantly higher. In our view, Greek FM Varoufakis appears ready to use the nuclear option.

The RBA, in the minutes of their February meeting, viewed that the risk to growth was significant enough to cut the cash rate. Inflation outlook was to remain consistent with 2-3% target. In regards to FX, members restated that the AUD remained above many gauges of its fundamental value due the rapid decline of commodity prices. Clearly the RBA is monitoring AUD developments stating "future exchange rate movements would be affected by market expectations for monetary policy, both domestically and abroad." Then added their balanced view stating "a sustained further depreciation would, if it occurred, stimulate growth in the domestic economy and put some temporary upward pressure on inflation." In regards to the timing members decided to cut in February rather than March in order to provide additional details on its action in Statement on Monetary Policy. The less then dovish RBA minutes sent AUDUSD to 0.7810. With more short covering expected AUD/USD’s focus will be on resistance at 0.7845 and key barrier 0.7882.

While traders will be focused on Greece, notable events will also be German ZEW expectations to rise further from 55.5 points to 57.7 in February, UK CPI inflation is likely to ease from 0.4% y/y to 0.3% y/y in January. While in Switzerland, Thomas Jordan will discuss, “Switzerland in the heart of Europe: between independence and interdependence” , with a possibility he steals an opportunity to express that CHF remains overvalued.

Luc Luyet, CIIA – Senior Market Analyst:

“According to the Japanese government’s forecasts, even with a 10% tax hike in April 2017, a primary surplus will not be reached in 2020. As a result, Mr. Abe will need to release a new roadmap showing his commitment to respect this fiscal objective. In the meantime, the Bank of Japan will likely stay on the sidelines, waiting for the new fiscal strategy from the government. As the new roadmap is expected to be released in June, any hopes to see the BoJ easing before that time are likely to be deceived.”

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