Market Sentiment Softens As Greece Decision Looms

O/N BULLETS

• Lloyds Employment confidence rises to -73 in January up from -75
• IMM data showed net EUR shorts declined from record highs in the week ending 31 January
• No agreement on Greek second bailout, reports suggest deadline for Greek party leaders set for midday

USD

USD suffered vs risky currencies on Friday after stronger numbers from the US. US payrolls rose more than expected, and the unemployment rate continued to fall in January; ISM Services were also strong, further helping equities and risky FX (SEK, AUD, CAD) trade higher. But USD made gains vs JPY and CHF as rates spreads widened in favour of the US; US yields had notably declined after the Fed announcement that rates could stay low until late 2014 in January. With on-going uncertainty surrounding Greece, market sentiment will remain soft today and we expect to see continued upside bias to USD.

EUR

EUR/USD failed to benefit from the strong US numbers, as concerns surrounding Greece weighed on the Euro. There was progress over the weekend regarding talks on the second Greek bailout while some terms had been agreed, some demands were not. Reports suggest the three Greek party leaders are due indicate whether they will accept the terms midday today. This will likely weigh on market sentiment and put downward pressure on EUR/USD through much of the morning as we wait for more news from Greece. Today's Germany Factory Orders are expected to be stronger, but will likely be overshadowed by headlines from Greece.

GBP

GBP/USD underperformed during Friday's risk-on move, mainly dragged lower by the weak EUR. The much stronger PMI services saw a muted market reaction, and while it raises doubt over whether the BoE will announced additional asset purchases at the MPC meeting on Thursday, our economists maintain their call for another £50bn worth of QE, but will likely be a closer call now.

CHF

CHF weakened on Friday. SNB Vice-Chairman Jordan re-iterated the SNB's commitment to defend the 1.20 EUR/CHF floor however also revealed investigations were being done on the influence of the government on the SNB, which could potentially limit the size of FX intervention. This could have been the cause of EUR/CHF persist downtrend in recent weeks. However EUR/CHF edged higher on Friday after the Swiss government showed their support, saying that the floor of 1.20 was an absolute minimum; helping the market to regain confidence towards the SNB. We maintain the view that the 1.20 floor will hold for now.

Spotlight – CAD a risk positive North America proxy – Weak employment and subdued growth over the past few months has weighed on CAD performance. CAD has largely lagged behind the other commodity currencies since the end of last year, with AUDCAD reaching new highs since the 90s last week. While the Canadian employment numbers were disappointing on Friday, surprising on the downside, CAD still performed well largely helped by strong US payrolls and ISM numbers, highlighting its status as a proxy for North America during risk positive periods. MXN was also one of the best performers in EM on Friday