EUR/USD
The Euro was unable to extend gains early in Europe on Friday and dipped sharply back to the 1.29 area against the dollar ahead of the US open as selling pressure resumed.
There were expectations that Greek negotiators would be able to reach a deal during Friday and there were rumours of an announcement which provided initial support. There was, however, no agreement in reality as talks broke down which curbed Euro demand and there were further concerns surrounding Portugal’s default risk as yield spreads over German bunds widened to record highs.
The latest speculative positioning data recorded an increase in Euro shorts to a fresh record high which maintained the potential for a further covering of positions, although it is possible that positioning may have already been adjusted. The Euro rallied back to the 1.2950 area in New York as risk appetite was generally robust.
There were no major US developments during the day as attention was focussed primarily on the Euro-zone. The Federal Reserve policy meeting will be watched closely this week with a policy announcement due on Wednesday. There looks to be little prospect of any policy changes, but there will be expectations that there will be a move to inflation targeting and the Fed is also set to announce its Federal Funds projections for the first time.
During the weekend, negotiators for Greek creditors stated that there best offer had been made which created fresh uncertainty over the situation with the IMF and EU representatives deciding whether to enforce a deal. In this context, the Eurogroup meetings on Monday and ECOFIN meeting on Tuesday will be watched very closely, especially as there will be further discussion over the fiscal-compact rules.
Pressure for further ECB covert support for the banking sector will continue. The Greek impasse undermined the Euro in early Asia on Monday with a retreat back to just below the 1.29 level.
Yen
The dollar hit resistance close to 77.30 against the yen on Friday and retreated to test support in the 77 region. The Euro was unable to sustain a move above the 100 level and retreated back to the 99.30 area.
The Japanese currency was still resilient in the face of generally firm global risk appetite which suggests that there is still little leakage from Japanese institutions into the international capital markets.
Many Asian markets were closed on Monday for the lunar new-year holiday which dampened activity and the dollar attempted to consolidate in the 77 area with some underlying support on yield grounds.
Sterling
Sterling found support on dips to the 1.5450 area against the US dollar during Friday and rallied strongly later in the European session.
The latest UK retail sales data was broadly in line with market expectations as volumes rose 0.6% for December following a revised 0.5% decline the previous month. There was evidence of aggressive price discounting in some areas and the extent of the volume increase was, therefore disappointing.
Bank of England MPC member Broadbent stated that the bank would not pre-commit on quantitative easing, but there were still expectations of further bond buying announcements by the central bank within the next few weeks.
Sterling continued to gain defensive support from fears surrounding the Euro-zone and there were also expectations of Asian demand for UK assets which helped underpin the currency. Sterling pushed to a 2-week high near 1.56 against the dollar and also strengthened through the 0.83 level against Sterling before hitting some profit taking.
Swiss franc
The dollar found support on dips towards 0.93 against the franc on Friday and advanced back to the 0.9380 area as it attempted to correct from recent sharp losses. The Euro was unable to make any headway during the session, trapped significantly below the 1.21 level.
National Bank member and acting Chairman Jordan stated that there was no alternative to the minimum Euro level and that further action will be taken if necessary to defend the 1.20 minimum Euro level. There will still be a temptation to challenge the National Bank’s determination, especially if risk appetite deteriorates again.
Australian dollar
The Australian dollar found support below 1.04 against the US currency during Friday and maintained a firmer tone during the day with a peak in the 1.0490 area. The currency gained support from an underlying improvement in risk appetite as immediate fears surrounding the global outlook eased.
If the risk of a sharp Chinese slowdown can be contained, then the economy will be in a much-improved position to benefit from firm US growth, at least in the short term, although the underlying risk profile may deteriorate again quickly. The domestic data did not have a major impact with a 0.3% increase in producer prices for the fourth quarter.
