Greek Pension Issues Still To Be Resolved Ahead Of The Eurogroup

O/N BULLETS

• China CPI stronger than expected at 4.5% y/y
• NZ unemployment rate fell to 6.3%
• Japan Dec machinery orders fall 7.1% m/m

USD

The USD managed a modest recovery against most currencies yesterday, but remains essentially dependent on fluctuations in risk appetite, which continue to depend on European developments. There is no major support for the USD index this side of 77.40, and clear negative news on risk seems required to break above 79.50, so we would be USD sellers on rallies at this stage, though mainly against the risk positive currencies.

EUR

We continue to move closer to a Greek deal with the Greek political parties close accepting the deal overnight and the Eurogroup convening this evening to ratify the arrangements. The deal should then go through the Greek parliament on the weekend and the swap should be initiated on Monday. It may still be the case that the full details of official involvement will not be known before the weekend, but with medium term positioning still short EUR, the downside looks limited if the second Greek bailout is likely to proceed. Any dip below 1.32 looks like a medium term buying opportunity.

GBP

GBP came under pressure yesterday in part on anticipation of today's MPC meeting. While we expect a 50bn extension of QE in common with most in the market, there is probably a bigger risk of a 75bn extension than of nothing or 25bn, and this suggests the risks to sterling are to the downside. While the UK data have been a little better of late, there is still no doubt that credit growth is weak and money growth in aggregate is still contracting. In this environment there is minimal risk from enacting more QE. If done, it will typically be negative for sterling initially (see below) though history suggests that the implementation of QE is much less sterling negative than its announcement or anticipation.

HUF

The HUF has been the world's best performing currency this year, and emerging markets in general have performed well. While there is still little reason to be positive on European growth, any reduction in risk premia should continue to benefit the currencies that suffered most from the crisis last year, especially if they offer an attractive yield. While there are obvious longer term issues for Hungary, any continuation of the recovery in sentiment towards the EUR should continue to support the HUF. 286 should be an initial target for EUR/HUF.

Spotlight - EUR/GBP - Today's decision on QE is likely to determine the direction in EUR/GBP today, and for the rest of the week. We expect a £50bn addition to the total, in common with most in the market, and this would probably be seen as short term slightly sterling negative in that sterling would be further associated with 'QE' currencies that are a long way from raising rates. As long as risk appetite remains well supported, this will tend to weigh on the pound. As the chart below shows, even the euro could have potential to gain if the euro crisis concerns are put to bed. We doubt this will be the case even if the next Greek package is agreed on, but it would suggest some upside risks to EUR/GBP in the short term