Still Waiting For A Greek Deal
O/N BULLETS
- RBA unexpectedly leaves rate unchanged – AUD surges
- UK BRC data shows 0.3% y/y decline in like for like sales
USD
The USD fell back at the end of a quiet European session yesterday, with support above 1.30 in EUR/USD holding in spite of the lack of any news from Greece. The USD continues to trade very soft this year, which surprises some who cite the better numbers relative to Europe. But with no rise in US yields likely to result from higher rates, and US equities relatively expensive compared to the euro area, there aren't a lot of reasons to buy the USD or USD assets on good news. So the USD for now looks likely to be determined more by news from the euro area. The failure to break higher on the lack of positive EUR news suggests risks are mounting of a lower USD if EUR news is more positive. But in the absence of news from Greece, range bound conditions should persist.
EUR
The EUR continues to find support in spite of deadlines in Greece continuing to be missed. The 'final' deadline still seems to be next Monday, but if we don't have progress by tomorrow a break below 1.30 seems likely. However, the strong support suggests the upside is also more vulnerable if there is positive news, especially since it may be reinforced by this week's ECB meeting and even by Bernanke's testimony.
GBP
Sterling continued to edge higher on a quiet day for FX, with doubts about the extent of QE this Thursday continuing to provide some support, as well as better economic sentiment and the general USD and EUR malaise. But sterling's gains on the back of USD and EUR weakness look a little false – there is little to recommend the UK above the US, and we would expect a struggle to make ground towards 1.60 unless dragged by a sharp EUR rally. Even then, EUR/GBP is likely to take a lot of the strain, and 1.5950/1.60 should prove good resistance.
NOK,SEK
The Scandis were strong yesterday, and now look like the risk currencies of choice. The AUD is too expensive, and has outperformed its yield spreads, while the SEK has moved in line with yield spreads, and on good news the rate cuts priced into Sweden are unlikely to happen, suggesting scope for a rally. Of course, there is also downside risk on negative euro area news, but in the medium term the SEK should outperform the EUR on both positive and negative scenarios.
Spotlight – AUD getting stretched? - The AUD has remained the market's preferred risk positive currency in recent weeks, making news highs against the CAD and Scandis as well as the USD and GBP. Only the NZD has outperformed in the G10. But even though the RBA left rates unchanged last night against an expected rate cut the AUD's yield attraction is now largely outweighed by its valuation, especially given that the AUD has outperformed its yield spreads in recent months. Perhaps more important now is the point that the main danger to Asia is European weakness, and with weak euro area growth already priced into the euro, further bad news now would be bad for risk appetite in general, and the AUD in particular given substantial long AUD positioning, while good news could be expected to benefit the European currencies where positions are less extended
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