Market supposedly still hopeful on a Greek deal despite knotty details, ECB opt-out on PSI deal and questions over longer term viability of Greek debt trajectory. Meanwhile, JPY weakness continues on QE forever meme.
Risk remains very much on as the Greece and Europe are supposedly stumbling toward some kind of “deal”. The endless details and hoops that the negotiating parties must jump through have become worse than tiresome to follow. In over-simplified terms, the key aspects now for the deal concern how the Troika side ensures that its debt gets repaid (escrow-like account, an issue that has been raised before) and there is considerable controversy over ECB plans to swap its Greek debt for other debt to avoid the PSI deal or the risk of so-called collective action clauses (which could be invoked if Greek bond holders refuse to comply with the “voluntary” restructuring terms. See this BusinessWeek article on the negative spin that might result from the ECB’s actions.
Chart: EURUSD
EURUSD saw a smart pattern reversal yesterday after performing a nasty head fake break lower through 1.30 and subsequent squeeze back into the range after strong US data put the risk on/USD down trade back on the menu. But what supports the pair beyond the upper end of the recent range? Only a continued blow-off rally in risk appetite…so anything above 1.3200 for the pair here is tough to swallow (note the 0.618 Fibo marked just below that level), though the pair must be given some leeway to zig and zag on headline risks in the coming trading days, i.e., par for the course.
JPY cross fever
JPY crosses are bolting higher with incredible strength as they continue to follow through higher on the fall-out from the aggressively dovish recent BoJ meeting, the risk-on atmosphere and higher yields, at least in the US. The US 2-year yield just crossed above its 200-day moving average and is close to the high end of the six month range (naturally not far above 0.25% as the FOMC statements are effectively promising zero rates until well over two years from now!). In Japan, the 10-year yield has remained pegged at the bottom of the range due to the promise of BoJ bond buying. Articles like this one from BusinessWeek suggest the BoJ will have a hard time reaching its 1% target, but if the JPY keeps up this streak of weakness, spiking importprices might trigger more noticeable inflation – of course of the wrong kind. The next psychological barrier for USDJPY has to be at the 80 level, which was an influential support area on the way down in late 2010 and much of 2011.
Chart: USDJPY
JPY crosses are outrunning some of the fundamentals like interest rate differentials, though the latter are less influential than the relative willingness to explode central bank balance sheets, as the latest BoJ meeting decisions have shown. In the longer term, the 80 level in USDJPY has been enormously influential and is the next technical and psychological resistance area. Note also the weekly Ichimoku cloud level just below 80.

US inflation – a wee bit uncomfortable?
The US headline CPI eased off slightly in January, but not quite as much as expected, and the core CPI pusher higher to its highest level September of 2008 to 2.3% YoY. That year-on-year comparison hasn’t fallen in consecutive months since October of 2010. The US bond market hardly took note, but at what level does inflation garner more notice? The core inflation may cruise under the radar as long as it does not exceed 2.5% (above which the index only spent 32 months since the mid-1990, with most of those months concentrated in 2000-01.) and the Fed’s favourite measure of core inflation, the PCE, is conveniently still below 2.0%.
Looking ahead
All eyes on Greece once again over the weekend – as headline risk on that front still appears the main driver for intraday and short term moves, though this market has reached such extremes (JPY crosses flying, Apple stock parabolic move to 500 dollars/share and major equity indices bumping up against post-Lehman highs, Brent crude at 120 dollars/barrel and within a couple of percent of record levels priced in Euros, etc.) that it feels like this market is very vulnerable to any shock that doesn’t feed the QE–to-infinity-therefore-buy-all-risky-assets hand over fist meme.
Have a wonderful weekend.

Economic Data Highlights

• Germany Jan. Producer Prices out at +0.6% MoM and +3.4% YoY vs. +0.3%/+3.2% expected, respectively and vs. +4.0% YoY in Dec.
• EuroZone Dec. Current Accountt out at +2.0B vs. -0.9B in Nov.
• UK Jan. Retail Sales ex Auto Fuel out at +1.2% MoM and +1.9% YoY vs. -0.3%/-0.1% expected, respectively and vs. +1.4% YoY in Dec.
• EuroZone Dec. Construction Output out at +0.3% MoM and +7.8% YoY vs. +0.4% YoY in Nov.
• Canada Jan. Consumer Price Index out at +0.4% MoM and +2.5% YoY vs. +0.3%/+2.3% expected, respectively and vs. +2.3% YoY in Dec.
• Canada Jan. Core CPI out at +0.2% MoM and +2.1% YoY vs. +0.1%/+1.9% expected, respectively and vs. +1.9% YoY in Dec.
• US Jan. Consumer Price Index out at +0.2% MoM and +2.9% YoY vs. +0.3%/+2.8% expected, respectively and vs. 3.0% YoY in Dec.
• US Jan. CPI ex Food and Energy out at +0.2% MoM and +2.3% YoY vs. +0.2%/+2.2% expected, respectively and vs. +2.2% YoY in Dec.

Upcoming Economic Calendar Highlights (all times GMT)

• US Jan. Leading Indicators (1500)
• UK BoE’s Posen to Speak (1900)
• China Jan. Property Prices (Sat 0130)
• New Zealand Jan. Performance of Services Index (Sun 2130)
• New Zealand Q4 Producer Prices (Sun 2145)
• New Zealand Q4 Merchandise Trade Balance (Sun 2350)
• Uk Feb. Rightmove House Prices (Mon 0001)
• Japan Jan. Nationwide Department Store Sales (Mon 0530)

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