Dollar Higher on Greek Stumbling Blocks

BBH CurrencyView

• Concerns over the Greek deal have seen the dollar move higher against most of the majors and EMs
• EuroStoxx 600 is off its lows but down 0.4%, bank shares down 1.7%; S&P 500 futures down 0.6%
• Safe have securities are rallying with 2-year bund yields down 2bps; Swiss Jan. CPI contracted by -0.4% m/m

The dollar is trading higher against most of the majors and EMs on concerns over the Greek deal as EU finance ministers demand more commitments from Greece. The euro headed back to levels near 1.320 after it stalled out around 1.330 on Thursday. Near-term support seen near 1.317 followed by the recent low of 1.303. Sterling is the only major currency advancing against the dollar, up marginally to 1.583, amid UK corporate demand related to a dividend payment. The Australian dollar is among the worst performers on the day against the dollar, down 1%, following the Reserve Bank of Australia’s statement on monetary policy.

We see Greece risks rising as brinksmanship continues. The Greek government gets its coalition partners to OK the austerity measures demanded by the Troika, but then Finance Minister Venizelos goes to the euro zone finance ministers meeting in Brussels and is basically given an incomplete, sees aid withheld, and then told to go home to Athens and finish his homework. Another emergency finance ministers meeting is reportedly set for February 15, with officials saying must detail further budgetary measures totaling EUR325 mln by then. Euro zone officials are playing a dangerous game, as opposition to austerity in Greece is surely intensifying, as evidenced by the resignation of the Deputy Labor Minister yesterday and by another socialist MP today. The poor Greek economic backdrop only makes it tougher to stick with austerity to meet fiscal targets. Yesterday, it was reported that the unemployment rate rose to a cycle high 20.9% in November from 18.2% in October, and December IP fell -11.3% y/y vs. -7.8% y/y in November. Greek unions will stage a 48-hour strike Friday and Saturday. Despite all the deadlines that have come and gone in recent weeks, we believe Greece and the euro zone is entering a critical phase right now and has less and less wriggle room ahead of the March 20 bond maturing.

The Reserve Bank of Australia (RBA) repeated its neutral stance in the Statement on Monetary Policy. The tone of the report was a bit on the dovish side as the RBA indicated that the current inflation outlook provides scope for easier policy if demand conditions were to weaken considerably. The RBA is forecasting inflation to remain around the midpoint of its 2-3% target for most of the next few years. The main source of uncertainty, of course, remains Europe. At the same time, the RBA revised its growth outlook as a result of two things – slower rebound in coal exports and Europe’s debt crisis and its potential impact on global economic growth. However, while the near-term growth forecasts were revised lower by 0.5%, the extended forecast is unchanged. That means, although the bank continues to hint at further rate cuts, it continues to indicate that this is conditional on weakening activity. The OIS is currently pricing in a 66% chance of a cut in March. Nevertheless, with trend-like GDP and inflation growth alongside ongoing downside risk from Europe we believe the RBA is likely to remain on hold again with scope for additional easing if conditions in Europe take a turn for the worse. We believe the AUD to be more sensitive to external factors rather than domestic ones and as a result expect the AUD to benefit from the recent improvement in growth expectations. In the very near-term, we expect the AUD is likely to be nearing a top off the back of the sharp adjustment in positioning and the potential for momentum to fade as euro zone uncertainties increase. Support seen near 1.060, while resistance is near 1.084.

China’s Trade data showed more resilient exports but much slower imports. The holidays probably distorted the import numbers to some degree, but our initial reaction is to see it as another sign that China’s slowdown is deepening. We do not see any immediate implications for CNY but it adds to the argument that policy easing will continue. Note, however, that Chinese equities outperformed regional peers led by outperformance of the real estate & investment sector (+1.79%) and the construction & materials sector (+1.24%). The moves are linked to news of subsidies and tax waivers offered for home buyers in the Wuhu and Anhui provinces. It is unclear whether the NDRC approved of the decision, but locals have started to speculate that this policy could be replicated in other cities. This follows other similar reports supporting the housing sector. Also, new loans for China came in well below expectations. Again, many will attribute the disappointment to the holidays, but we are not so sure. Markets are still looking for clues about how the “selective easing” policy is shaping up. We expected bank lending to be an integral part of China’s easing policy and thought it would be pre-emptive. The numbers released today put this thesis on the defensive. It still seems like the government is set to support housing, small businesses and farmer income this year, but the overall picture for easing is becoming more clouded.