Euro Weakness To Persist For The Next 30 Days?

The fx markets main focus continues to be the Greek sovereign debt issue and the potential of something concrete materializing from the ECOFIN meeting today. However, we are doubtful we will hear anything new. The Eurozone members are expected to pressure Greece into endorsing further austerity measures and will be given until mid March to prove it will be able to reach its forecasted deficit targets (we are not sure what an extra few weeks will do but…). As of yet, there has been no official bailout plan reported, only a softly worded statement on EU ‘solidarity’ and we don’t think a detailed strategy is coming any time soon. So, now FX traders can look forward to 30 days of nervousness and in our mind EUR weakness.

Overnight, there has been some harshly worded comments that suggest that members might not be a cohesive as last weeks statement advocated. Finland ’s Finance Minister stated that EU rules were “against a bailout” and any aid would have to be a bilateral agreement between Greece and members. He also suggested that Finland would not help and “Greece must get the money it needs from the market,” and that Finland has already help enough by supporting Latvia and Iceland . The Austrian Finance Minister said that the fuzzy economic data produced by Greek should not be allowed to undermine the credibility of the EUR.

Worryingly, Eurostat, which is already bringing Greece to court for statistical irregularities, today issued a statement that they were unaware that Greece used currency swaps to disguise gaps in their balance sheet. The statistical agency of the European commission has now set an end of February deadline for disclosure on these transactions. Because of the EUs own disclosure and accounting rules, members were not required to report these deals, so markets are completely in the dark to the size and scope of these swaps. And given the familiar names and structures being mentioned, it has eerier similarity to past crisis in the US at the state and country level.

Separately, The RBA minutes of Feb 2nd policy meeting provided no real insight into the timing of the next hike. The AUD bulls (us) found a glimmer of hope in the fact that the reference ‘finely balanced’ remained indicating that strong data leading up to March could sway members. The RBA is still accommodating and the expectation of further inflation assumes “gradual further increase in the cash rate” but the timing is uncertain. Currently, the market is not pricing in a hike in March but if data prints stronger than expected, we thing there is a good shot at another 25bp in March and keeping the AUD well supported.

Separately, in New Zealand, Q4 producer prices were weaker than expected, with input prices rising only 0.3% q/q vs. 0.5% expected, -1.1% prior, while output prices fell -0.4% q/q vs. 0.4% exp, -1.4% prior. The much anticipated UK CPI figures printed lower then expected at -0.2% m/m, 3.5% y/y vs -0.1%, +3.5% expected. The GBP sold off slightly ahead of the figures but with the outcome nowhere near the 4.0% y/y print some had expected, we believe the sterling downside is now exposed.