The global risky rally sustained its earlier gains in Asian session and continued to push higher. Rejuvenated confidence on a the ability of Greece to secure the Troika second bailout package buoyed risk sentiment yesterday, pushing equities higher and pushed Treasury prices and USD lower. EURUSD climbed to 1.3287 from 1.3100 yesterday while AUDUSD jumped to 1.0844. Asian equities kept the optimism going led by a rally in Shanghai up 2.43% and Hang Seng up 1.47%. Weak Japanese trade numbers keep JPY under selling pressure as USDJPY rose to 77.16. In late NY session risk got a big boost from the headlines that the ECB was willing to make a concession and contribute to Greece debt reduction by exchanging Greek bonds with EFSF. And once again Greek government spokesperson announced that political leaders would meet today to respond to a draft bailout proposal. Assuming political agreement, Greek parliament will then need to endorse the package of austerity measures, which is basically, a formality given the ruling coalition's sweeping majority. . This would realize one of the two conditions the Troika has placed for payment of the €130bn package. The PSI agreement is the second condition. EURUSD reacting strongly to this headlines, which indicates how negatively positioned the market currently is. But we can’t shake the Greek Finance Minister comments that negotiations with the troika remain complicated. He warned that new issues were arising despite improvement in talks. And according to the PASOK party in Greece, PM Papademos has instructed the country’s Finance Ministry to 'document the costs' of a Eurozone exit. Given the missed deadlines and complexity of the deal we think that EURUSD has gotten ahead of itself, and would be bracing for a pullback.
With the light economic calendar today will once again be dominated by waiting for an indication on how parties might proceed on the bailout and the PSI issues. Yesterdays, German industrial production was very soft in December, while Industrial production fell by 2.9% mom in December, much worse than the expected 0.0%. In light of a very weak all around read of December industrial production, we suppose that the German Statistical Office will now have to revise down its initial Q4 GDP 2011 growth estimate -0.25% marginally. In Japan, traders got a shock to learn that the MoF conducted "stealth" intervention in November 2011. Japanese Finance Minister Azumi was on the wires in Asian session with his usual comments on intervention in the currency markets but wouldn’t comment on FX interventions. Given this disclosures we see traders less willing to go long JPY.
In Switzerland, SNB Chief Thomas Jordan provided a well timed verbal intervention to protect the SNB's 1.20 “floor”. Jordon stated that "the SNB will not tolerate any trading below the minimum rate in the relevant interbank market. To enforce this policy, it is prepared to buy foreign currency in unlimited quantities if necessary. Moreover, it stands ready to take further measures if the economic outlook and the risk of deflation so require." The comments gave the EURCHF a brief burst of 20 pips, but momentum quickly cooled as the comment was almost verbatim from a recent FT interview. However, as the EURCHF inches toward the 1.200 level, it clear that the SNB is playing a dangerous game (although bounce to 1.2100 give them some breathing room). By allowing the CHF to strengthen against the EUR, the SNB is attempting a risky “goal-line” defense. The problem is that with so many speculators betting that 1.200 will not budge there is a risk that the sudden rush of sell orders could overwhelm the SNB. While the SNB has taken steps to widen its market reach by expanding list of counterparty banks the size of the potential short position especially given the rampant use of leverage is completely unknown.
By
With the light economic calendar today will once again be dominated by waiting for an indication on how parties might proceed on the bailout and the PSI issues. Yesterdays, German industrial production was very soft in December, while Industrial production fell by 2.9% mom in December, much worse than the expected 0.0%. In light of a very weak all around read of December industrial production, we suppose that the German Statistical Office will now have to revise down its initial Q4 GDP 2011 growth estimate -0.25% marginally. In Japan, traders got a shock to learn that the MoF conducted "stealth" intervention in November 2011. Japanese Finance Minister Azumi was on the wires in Asian session with his usual comments on intervention in the currency markets but wouldn’t comment on FX interventions. Given this disclosures we see traders less willing to go long JPY.
In Switzerland, SNB Chief Thomas Jordan provided a well timed verbal intervention to protect the SNB's 1.20 “floor”. Jordon stated that "the SNB will not tolerate any trading below the minimum rate in the relevant interbank market. To enforce this policy, it is prepared to buy foreign currency in unlimited quantities if necessary. Moreover, it stands ready to take further measures if the economic outlook and the risk of deflation so require." The comments gave the EURCHF a brief burst of 20 pips, but momentum quickly cooled as the comment was almost verbatim from a recent FT interview. However, as the EURCHF inches toward the 1.200 level, it clear that the SNB is playing a dangerous game (although bounce to 1.2100 give them some breathing room). By allowing the CHF to strengthen against the EUR, the SNB is attempting a risky “goal-line” defense. The problem is that with so many speculators betting that 1.200 will not budge there is a risk that the sudden rush of sell orders could overwhelm the SNB. While the SNB has taken steps to widen its market reach by expanding list of counterparty banks the size of the potential short position especially given the rampant use of leverage is completely unknown.
By
M.Zohaib Gadit
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