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Dollar Mostly Softer as Greek Deal Inches Closer

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  • The dollar is extending its recent losses against most of the majors and EM on hopes over Greece
  • The S&P 500 closed at its best level since July 7, 2011; EuroStoxx 600 at fresh six-month high
  • European banks are currently up 1.5%; Swiss seasonally adjusted unemployment remained steady at 3.1%

The dollar is extending its recent losses on hopes that Greece is inching closer to a deal that would ensure the next bailout payment, though the major currencies remain in relatively tight ranges. The euro is flat, trading around the North American close of 1.326, after unsuccessful attempts of breaking 1.330. Given market positioning and the potential for more shorts to get squeezed out of the market, we suspect the euro may have more room to run, with the 1.340 the next target. Sterling continues to meet resistance ahead of the 200dma (1.594) and tomorrow’s BoE meeting. The dollar is advancing against the yen for the second day in a row, with the dollar-yen trading near 77.00 following weak December current account data. The dollar bloc currencies are advancing, which saw the Australian dollar move to six-month highs towards 1.085. Elsewhere, Poland’s central bank, as expected, left rates unchanged at 4.50%.

Sentiment regarding Greece continues to improve, with talk yet again that a PSI deal has been reached. In addition, media is reporting that the ECB has agreed to transfer its Greek bonds purchased under SMP to EFSF at cost, which amounts to an estimated EUR11 bln savings for Greece. This is a compromise, as some have reportedly been pushing the ECB to take a haircut along with the private sector. There are still some potential bumps ahead, as Greek Prime Minister Papademos will meet today with his coalition parties about supporting further austerity demanded by the Troika. That meeting was reportedly delayed several hours, and while this will be most difficult part of getting the next aid tranche, markets appear to be pricing in eventual success. The euro continues to firm and broke 1.3244 yesterday, the 38% retracement level of the October-January drop in EUR/USD that had capped the upside this past week. This targets the 50% level around 1.3435.

On the data front, German trade surplus for December was slightly lower than expected, but what’s noteworthy is that both exports and imports dropped much more than forecast, at adjusted -4.3% and -3.9% m/m, respectively. This supports the view that even Germany is not immune from the slowdown in Europe. In that regard, Spain IP “only” fell -3.7% y/y in December and was better than expected.

Japan’s December current account (non-seasonally adjusted) totaled ¥304bln, significantly below expectations of ¥340bln. This represents a 74% drop from the surplus seen in December of last year, while investment income (non-seasonally adjusted) declined, registering its lowest reading in 6 months of ¥700bln. Further, the disappointment in the current account was driven primarily by the sharp drop in income as the trade balance actually saw a modest improvement from last month, increasing from -¥585bln to -¥135bln. Looking ahead, the current trend in the trade balance is likely to suggest that trade in goods is likely to remain sluggish as external demand remains soft and the broad strength of the yen hampers competitiveness. On the import side demand for energy and other imports are likely to keep the overall trade balance in deficit, with the price of oil especially important. The investment income from Japan’s stock of overseas external assets may continue to fall as well, reflecting the lost competitiveness of the stronger yen and eroding the net value of the net income derived on those assets. In the near-term the dollar has been confined to about a 25 tick range against the yen. Initial resistance is seen near JPY76.90 and a break of it could see a quick move toward JPY77.40.

In China, There was a lot of interesting news for China overnight, especially for the banking sector. First, total bank lending in January is expected to come in around RMB800bn according to the China Securities Journal. Prior estimates were around RMB1tn. Equity markets rallied sharply despite the disappointment, though volumes were very light ahead of tomorrow’s CPI and PPI data. We still expect bank lending to be ramped given the growing downside risks to the Chine economy and we prefer to wait until the final lending data comes out next week to draw a firm conclusion. Second, a local news report suggests that the Banking Regulatory Commission will allow a longer preparation period for banks to comply with the new capital rules, moving the deadline from January to July 2012. It will also lower their risk weightings on certain loans in line with our view that the government will go out of its way to support small businesses this year. Lastly, domestic fuel prices were raised in order to “encourage production by the refiners and ensure supply to the domestic market,” according to the official statement. This type of move the day before inflation data is released makes us think that risk tomorrow is skewed towards a lower number.

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