Foreign Exchange News
27 January 2015

EUR Rallies as Contagion Contained (for now)

EUR/USD 1.1319
GBP/USD 1.5092
GBP/EUR 1.3333 (0.7500)
EUR/CHF 1.0291
GBP/CHF 1.3717
GBP/AUD 1.8989

The EUR advanced against almost all major currencies through yesterday’s session as markets shook off concerns about the far left victory in the Greek elections. The EUR had started the day on a much lower peg following declines on Sunday’s market open, but as we await further details and insight into the new Greek government we have seen the Euro trade higher. The steps taken by the ECB last week no doubt softened the blow of the Greek election fallout and combined with other steps taken over the last 4 years, resulted in reduced contagion concerns across Eurozone financial markets. Certainly for now contagion appears to have been well contained, Greek 10 year bond yields jumped over 47 bps in the opening 24 hours of the week, while Spanish and Italian bonds remained relatively unchanged at +/- 1bps. That is not to say we have seen the end of political instability, the Syriza party has chosen the far right anti bailout ANEL party as its coalition partner and with further details on policy likely to emerge we remain cautious on euro risk for now.

Equity market risk remained well supported by the prospect of cheap money, the base effect of the ECB’s action, similar to QE programs we have seen in the US and UK, will result in yields in fixed income securities dropping, we already saw a number of fresh yield lows in Euro zone peripheral debt since last Thursday but that means investors seeking higher yields have to look to different markets for returns, equities tend to be the most immediate benefactor and yesterday we saw the European Stoxx 600 advance for the eighth straight day. The positive equity tone carried through to the US session and was maintained overnight in Asia. Interestingly the JPY rose alongside Japanese equities, usually inversely correlated, the JPY rallied following comments from the economic minister suggesting neither the government nor BoJ have committed to a fixed schedule to achieve their 2% inflation target. Elsewhere in currency markets the commodity currencies rose as the price of oil rallied some 1.5% on the day, CAD, NOK and AUD all posting gains. GBP has been firmer against the USD in the opening hours of the week, while just losing out against the EUR despite maintaining last Friday’s trading range in EURGBP.

The big release of the day provides GBP with a chance of a rally, preliminary GDP is expected from the UK and the fourth quarter figures are expected to show GDP rose 2.8% year on year, with a .6% growth reading for Q4, in line with recent UK growth trends. Aside from the weak CPI inflation readings coming from the UK, other data has tended to surprise to the upside. Growth figures remain consistent while we have seen important advances in wage growth in the last three months. There were several BOE members’ comments crossing the wires yesterday suggesting the BOE may have to raise rates sooner than currently guided (Q1 2016). Any pick up in GDP, or an improvement in the interest rate hike horizon will be supportive of GBP and should see further gains across sterling pairs.

There is plenty of data from the US today but market participation may well be reduced given the huge storm expected to hit the US east coast, essentially almost shutting down New York if warnings are to be believed. US markets have only been closed three times in 100 years due to bad weather and we do not expect a full closure but with many market participants opting to remain at home volumes traded may well be significantly lower with less liquidity in markets. Durable Good orders headline the US session and while a .3% increase is expected it may not be enough to drive the USD advance further. Elsewhere US consumer confidence and house price data also cross the wires.

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