February 6, 2012

Market Summary

After a bout of optimism generated by a solid US payrolls report last Friday, the focus is shifting back to developments in Greece. An agreement between Greece and private bondholders is still lacking, while Prime Minister Papademos has struggled to achieve domestic political backing for further budget austerity measures. While we still believe that a voluntary Greek debt restructuring deal and further EU aid will be forthcoming, the risks of a more disruptive scenario have probably increased. European developments are weighing on risk sentiment and financial markets more broadly against the backdrop of a relatively quiet economic calendar. Some of the emerging currencies, including the forint and rand are among the largest decliners today, while the Australian dollar and other commodity currencies have also slipped. Central banks will be in focus this week - further policy easing is expected in Australia and the UK while the ECB should remain on hold. Without a Greek debt deal global markets should remain under pressure and the dollar supported in the days ahead.

Regional Highlights

Asia/Pacific

With the focus shifting from last Friday’s positive US data to Greek debt deal uncertainty, most Asian currencies are lower against the US dollar. One exception to that trend is the Japanese yen which is holding steady even as Bank of Japan Governor Shirakawa said economic conditions were “severe” because of deflation and a stronger yen. The Aussie dollar is lower as Australia’s December retail sales unexpectedly dipped by 0.1% m/m, while Q4 real retail sales rose by 0.4% q/q. The NZ dollar is also lower, while in emerging Asian FX movements, the rupee and Singapore dollar are the largest decliners today. In other regional economic data, China’s December leading index fell, Indonesia’s Q4 GDP slowed to 6.49% y/y and Taiwan’s January CPI quickened to 2.37% y/y.

Europe

A Greek debt deal is still lacking, while Prime Minister Papademos has struggled to reach a get political parties to agree on further spending cuts demanded by European officials. Comments from Fitch Ratings who said that a disorderly Greek default “cannot be wholly discounted” is likely contributing to the negative sentiment. Greek developments are weighing on the euro, while positive Eurozone economic data has had limited impact. Germany’s December factory orders rose by a stronger than expected 1.7% m/m, while Eurozone February investor confidence rose to -11.1. Other European currencies are lower against the greenback but mixed against the euro, with the pound outperforming but the Swedish krona underperforming the single currency.  UK January Halifax house prices rose by 0.6% m/m. The forint and rand are the weakest among regional emerging currencies while the ruble is steady as  Russia’s January CPI slowed to 4.2% y/y.

Americas

There is no US data scheduled today. In today’s comments St Louis Fed President Bullard said keeping interest rates very low to counteract a high degree of economic slack may be a costly mistake. Elsewhere, Chile’s December economic activity unexpectedly quickened to 5.3% y/y. Canada’s January manufacturing PMI is expected to fall to 59.7 later today. The Canadian dollar is lower, although it is holding up better than other commodity currencies. Latin American currencies are also lower, including the Mexican peso, Chilean peso and Brazilian real.