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USD stronger as Greek optimism wanes

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Forex markets remain focused on developments surrounding the Greek aid negotiations. Yesterday’s rumors that Greece might request extensions to the current bailout helped reduce the pressure on financial markets. However, clearing away the rhetoric anonyms statements, parties still are at an impasse and time for finding a solution is limited. In addition, on the geopolitical front, the recently negotiated cease-fire agreement between Russia and Ukraine looks to be on the brink of collapse. Markets need solid, verifiable news to keep the current risk recovery moving.

Asia regional indices are mostly higher following S&P closing at a record high of 2100, with the Nikkei up 1.18%, Hang Seng and ASX up 0.19% and 0.98% respectably.

USD/JPY in thin trading, bounced about 118.90 to 119.30 as the BoJ held monetary policy in a vote 8-1, to maintain QQE. Higher US yields were supportive but large option expiries at 119.00 and 119.50 kept upside restrained. JPY spikey price action was due to US 10-yr treasury’s moving sharply upwards in Asia before settling down at 2.11%. Luc Luyet, CIIA – Senior Market Analyst: “As expected by the market, the Bank of Japan kept its monetary policy unchanged. We continue to see two reasons for the BoJ to further increase its stimulus in the second half of the year. First, the BoJ was likely quite surprised by the weak Q4 GDP data. Unless Q1 GDP increase more than 8% qoq in annualized terms, the BoJ’s growth forecasts for the 2014 fiscal year will be missed. Given the need to lift growth ahead of the fiscal hurdles like the second like in VAT, the BoJ could be forced to support more actively the Japanese growth outlook. Second, contrary to BoJ’s expectations, the CPI ex-VAT effects could move into negative territory given the ripple effects from the low oil prices and the expected decline in LNG prices. A negative CPI would likely force the BoJ to respond through additional monetary stimulus.”

Optimism over a potential deal with Greece had traders cut safe-haven trades including US treasuries and Gold, which has fallen 2.635 in three days. EURUSD consolidated around 1.1400 for most of the session but now bearish monument is starting to take hold. Yet with EURUSD short still dominate, downside should be limited despite mounting headwinds from Russia and Greece.

AUD/USD remained bid post RBA less dovish minutes trading between 0.7805 and 0.7832. Traders are focused on 0.7880 which would signal a trend reversal. AUDNZD consolidated loses around 1.0370 right above all time low at 1.0333.

Minutes of the Bank of England policy meeting and unemployment report will the key data release today. Markets expect no change in voting pattern with all nine member voting to keep policy stable while headline unemployment will stay flat at 5.8%. This follows data that indicated that UK inflation has eased to a record low as energy and food prices contracted. Dovish expectations are weighting on GBPUSD demand.

Outside of the fluid headlines emulating from Greece and international creditors, traders will also be watching minutes of the January FOMC statement. It will be interesting to view the discussion around certain phases such as “international developments” and “patient”, yet no real signal on timing is expected. Therefore market volatility should be limited. More likely Yellen’s congressional testimony next will could provide insight on to when the Fed is planning the first hike. That said, we should hear that the pace of US economic growth is solid, being led by job creation. It will be interesting to see any concern over the soft inflation reads. Overall, the minutes should be slightly more hawkish illustrating the Fed “patient” is waning. Returning bullish monument to the USD.

EUR/CHF continues to stage a solid recovery to 1.690 area. Break above key resistance 1.7000 (61% fibo level from sell-off) would give scope for extension to 1.0850 then 1.1005. The catalyst has been the singlet strong EUR but also comments from SNB's Chairman Jordan. Jordon took the opportunity yesterday to repeat that he viewed the CHF is significantly overvalued, which traders took as a warning that additional FX intervention is possible.

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