Further Focus on the Greek Debt Restructuring

EUR/USD

There was further solid Euro demand in European trading on Monday which pushed the currency to challenge 2012 highs and a break above the 1.30 level triggered further stop-loss Euro buying.

There were further gains for European stocks as liquidity conditions improved and this had an important positive impact on risk appetite which curbed defensive demand for the US currency as well as helping to improve confidence surrounding the Euro.

There were suggestions from German government officials that they might consider running the EFSF in tandem with the ESM in an emergency situation, although any increase in ESM funding would be rejected.

There was a further focus on the Greek debt restructuring during the day with initial optimism that a deal could be agreed. In the event, the Eurogroup meeting rejected the deal put forward by creditor negotiators. There will therefore need to be fresh negotiations, aiming for an agreement around mid February. Given that Germany also rejected any increase in the Greek bailout amount, there was fresh speculation over a hard default which triggered fresh selling pressure on the Euro.

There were no major data releases during the day with some caution ahead of the Federal Reserve meeting which starts on Tuesday. Principal attention will focus on the new Fed interest rate projections and possibility of a move to a formal inflation target with no policy changes expected at this time. There are still substantial market expectations that the Fed will move towards further quantitative easing and any downplaying of these expectations would help support the dollar.

The Euro peaked in the 1.3050 area against the US dollar before dipping back to the 1.30 level with little change during the Asian session on Tuesday.

Yen

The dollar was unable to make any fresh impression on resistance levels above 77 against the yen during Monday and dipped back to the 76.85 area before finding support as the US currency maintained a generally softer tone. The Euro pushed back above the 100 level where resistance remained tough to break down.

There no significant policy changes by the Bank of Japan at its latest monetary meeting with interest rates held in a 0.00-0.10% range and no changes to quantitative easing while the growth forecasts for the year ahead were downgraded.

There should be an underlying decline in defensive yen demand as global risk appetite improves, but the yen is still proving to be broadly resilient. Trading conditions remain subdued with many Asian markets closed for holidays this week and the trend in capital flows next week will be an important indicator of underlying yen demand.

Sterling

Sterling continued to take advantage of dollar vulnerability during Monday and pushed to two-week highs at 1.56 before dipping weaker. The Euro maintained a firm tone against the UK currency with a move to the 0.837 area.

MPC member Posen stated that the Bank of England was right to consider further quantitative easing which will maintain expectations of further action by the central bank. Posen, however, also stated that the downside risks to the economy had declined over the past few weeks and this will tend to dampen expectations of aggressive Bank of England action, especially with Posen generally the most dovish member of the committee. This should underpin Sterling, although the flow of defensive funds will also be watched closely as any sustained improvement in Euro confidence could curb defensive Sterling demand.

Swiss franc

The dollar remained under pressure against the franc on Monday and was subjected to further losses on technical ground once support in the 0.93 area was broken and the currency dipped to 2012 lows near 0.9250 before a corrective recovery. The Euro was unable to gain any traction despite a generally firmer tone on the crosses and was trapped near 1.2070.

This Euro under-performance against the Swiss currency will be a cause of concern for the National Bank and there will be the potential for further verbal intervention in the short term.

Source: VantagePoint Intermarket Analysis Software

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Australian dollar

The Australian dollar maintained a strong tone on Monday and pushed to highs in the 1.0570 area as risk appetite improved and the US currency remained on the defensive. There was selling pressure at higher levels and it retreated back towards 1.05 with the Greek debt impasse having a negative impact on sentiment.

There were no major domestic influences during the day. The latest Euro-zone PMI data will be watched closely on Tuesday and stronger than expected readings would help underpin sentiment towards the global economy which would also tend to support the Australian dollar.