Yet another postponement on Greece. Hard to say if, after all the delays, a rapid conclusion may still support the euro. On the whole, however, there does seem to be further upside margin, at least as an impact reaction. ..…
Once again last week the currency markets were almost exclusively dominated by the Greek crisis. “Almost exclusively” as, after a seemingly interminable wait, a change came elsewhere, namely in Japan, for the yen.
EUR – Once again this week a definitive solution for the Greek crisis was not found, and the euro suffered as a result, for days, slipping from EUR/USD 1.33 to 1.29. Then, on Thursday, a handful of positive developments, albeit still without the bailout package being issued, were enough to restore confidence to the market, and the euro climbed back half way. In light of how the Greek crisis has extenuatingly dragged on, and the non-linear effects this has produced on the exchange rate, it is hard to say whether a potential definitive conclusion at Monday’s Eurogroup may trigger a further upside acceleration or a retracement in the opposite direction. From a purely technical point of view, the current configuration does not provide strong directional indications. Located beneath the 1.3233-1.3165 corridor is the downside front that in January saw the euro drop to 1.26. In light of the fact that if the Greek crisis is not definitively solved on Monday, there would still be time until the following Eurogroup meeting at the beginning of March, there could be greater changes of the swift achievement of a final solution triggering an upward reaction. Upside margin could extend to recent highs at 1.3322 (or even into the 1.34 area). On the other hand, new complications and further delays could result in a correction of the exchange rate at least into the 1.28 area (technically, downside margin extends to 1.26).
JPY – Important news from Japan: the BoJ has introduced an inflation target and further stepped up quantitative stimulus. This has contributed to at last shaking the yen out its stall, tearing it from the USD/JPY 77 mark and leading it into the USD/JPY 79 area – last reached on 31 October following the BoJ’s direct intervention on the market by selling yens and purchasing dollars, and pushing up the USD/JPY exchange rate – for one day only – from 75 to 79. The new monetary policy approach has had the effect of decoupling the long-awaited deprecation of the Japanese currency from a drop in risk aversion resulting from the euro area debt crisis being overcome. Therefore, the long-awaited downside reversal of the yen seems to have started at last. Any new complications on the Greek front may temporarily slow the current movement, but should not halt it.
GBP – On the other hand, domestic issues seem to have no effect on sterling, still guided by the strong positive correlation between the GBP/USD and the EUR/USD. The Inflation Report confirmed the existence of downside risks to growth and inflation, but the pound continued to react mostly to developments in the euro area. Therefore, sterling dropped against the dollar as long as the euro also dropped, and rose back in step with the single currency into the GBP/USD 1.58 area. Data releases were mixed, but sterling is reacting asymmetrically, showing resilience on poor data, and climbing on positive releases (such as January retail sales, which accelerated as opposed to expectations for a contraction). Next week the minutes of the latest BoE meeting will be released. We expect the decision to expand the APF to have been taken unanimously. As the Inflation Report has already been published, the minutes are unlikely to contain important news, and therefore should have no part in depressing the pound. Therefore, sterling should continue to track the euro next week as well, with a stronger predisposition to deepen the foray into the EUR/GBP 0.82 area.
SEK – As widely expected, the Riksbank cut interest rates from 1.75% to 1.50%, and revised downwards its forecast of economic growth in Sweden this year, from 1.3% to 0.7%. The SEK reacted immediately, slipping against the euro, from EUR/SEK 8.77 to 8.84. A further weakening is possible on a 1m-3m horizon, also due to the downside risks weighing on growth as a result of the euro area’s hardships. The central bank, which has also released its forecasts for the reference repo rate, expects to keep rates stable for the remainder of the year. Two Board members, however, voted in favour of a 50bp cut instead of 25bps this week, and the SEK’s drop seemed to reflect doubts that another rate cut could take place in the months ahead. In the meantime, the minutes of yesterday’s meeting will be released on Wednesday 29, February.
Appendix
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