Risk FX Higher Post RBA as All Eyes in Athens

Top Stories

• RBA surprises with no cut send Aussie through 1.0800
• Euro on tenterhooks awaiting Greek deal
• Nikkei off -0.13% Europe off -0.46%
• Oil at $96.70/bbl
• Gold at $1725/oz.

Overnight Eco

• AUD AiG Performance of Construction Index (JAN) 39.8 vs. 41.0
• JPY Leading Index (DEC P) 94.3% vs. 93.9%
• EUR German Industrial Production s.a. (MoM) (DEC) n/a
• GBP BRC Sales Like-For-Like (YoY) (JAN) -0.3% vs. 2.7%

Event Risk on Tap

• USD Consumer Credit (DEC) expected at $7.0B
• CAD Building Permits (MoM) (DEC)

Price Action

• USD/JPY trades to 76.75
• AUD/USD takes out 1.0800 post RBA hold
• GBP/USD rallies to 1.5830 despite weak BRC
• EUR/USD takes out 1.3150 as traders hope for Greek deal

Risk FX was trading higher in midmorning European trade today, boosted by surprisingly upbeat RBA and expectations that Greece was moving closer to a deal on the European bailout package. The RBA surprised the markets by keeping it benchmark interest rate on hold at 4.25%. Ahead of the meeting interest rate markets were pricing in an 84% chance of a 25bp rate cut.

However, the RBA chose to remain stationary citing improving conditions in North America and continued growth in China. In the month statement by RBA Governor Glenn Stevens noted that, “Recent data from the United States suggest a continuing moderate expansion after a soft patch in mid 2011. Growth in China has moderated as was intended, but on most indicators remained quite robust through the second half of last year.”

The uplift in Asia and North America has offset the problems caused the European sovereign debt crisis and convinced Australian monetary officials to keep rates steady for the  time being as “information on the Australian economy continues to suggest growth close to trend.” The central bank went on to note that, “With growth expected to be close to trend and inflation close to target, the Board judged that the setting of monetary policy was appropriate for the moment. Should demand conditions weaken materially, the inflation outlook would provide scope for easier monetary policy.”   

As we noted earlier, the action by the RBA suggests that the Aussie has a strong chance of testing its all time highs near the 1.1000 level, especially if European officials could complete the Greek deal this week, eliminating the key risk factor in the market. Negotiations in Athens continue with Prime Minister Papademous expected to meet with opposition party officials at 16;00 GMT today.

The FX market is acting like it believes that a deal will done with EUR/USD trading firmer at 1.3150. Greek officials must still address recapitalization of banks, ensure the viability of pension funds and reduce wages and non-wage costs in order to comply with creditors demands. The country  still needs to agree on 600 million euros of  cuts for 2012. Yet despite the considerable obstacle the political pressure to complete the deal remains intense with Ms. Merkel reiterating that “We want Greece to stay in the euro.”

In North America today the economic calendar remains quiet with only Consumer confidence at 15:00GMT. The market anticipates a small rebound which given the improvement in the labor conditions should be likely. Also on the docket is Chairman’s Bernanke testimony to Congress where   he is likely to reaffirm the Fed’s dovish monetary stance. Trading in FX however will continue to be driven by headlines from Greece which in turn are likely to have an impact on equity flows as well. Therefore any sign of progress could push EUR/USD through the  1.3200 level, but the situation remains highly volatile and further disappointment could trigger another selloff towards 1.3000.

FX Upcoming