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Foreign Exchange

London: 8 February 2012 07:00 GMT

FX Daily Strategist: Europe

Waiting for resolution on Greece The biggest mover yesterday was EURUSD as the USD came under a little pressure from a dovish Fed Chairman Bernanke and as more optimism surrounding the Greek bailout talks provided a boost to the single currnency. Bernankes testimony before the Senate Budget Committee was similar to his testimony before the House Budget Committee, but markets reacted to his comment that the decline in the unemployment rate understates the weakness in the labour market. The EUR rally was fuelled by a headline suggesting that the Greek government was drafting an agreement on the bailout deal for political leaders to approve on Tuesday - and although the optimism proved unfounded as the meeting among Greek politicians was delayed to today, the damage had already been done: EURUSD has broken through resistance at 1.3244, and at least on a technical basis, this opens the way for further gains. Indeed there are more signs of progress, with reports that the ECB is willing to exchange Greek bonds with the EFSF, further contributing to Greek debt reduction. While the private sector holds the majority of Greek debt, some form of official sector participation is almost inevitable for Greece to achieve the proposed 120% debt/GDP ratio by 2020. but when it comes, we may see risk currencies rally less than expected as EUR-crosses rally While the EUR gained smartly against the USD yesterday, other currencies have been much more subdued. Uncertainty over the Greek situation no doubt contributes to an unwillingness to add to risk, but the rebound in EUR crosses perhaps provide a clue to likely market moves on an eventual resolution. While we favour commodity currencies to outperform over the medium-to-long term particularly as EUR labours in the face of a struggling eurozone economy and against the backdrop of the jumbo ECB 3-year LTROs the initial move on a Greek breakthrough may see a somewhat counterintuitive reaction. With positioning still very short EUR, a positive outcome risks seeing further unwnd of EUR shorts, which runs the risk of triggering stops in many of the crosses. EURAUD and EURGBP would seem particularly at risk here. As such, these currencies may struggle to rally significantly against the USD, even if the removal of the crisis overhang suggests they should. Ultimately though we believe any spike higher will prove an attractive selling opportunity: medium-term EURAUD should continue to move lower. Japan current account surplus smaller, but BoJ removing liquidity The Japanese current account released this morning showed the smallest surplus in 15 years but confirm that the income account remains more than large enough to offset a (recovering) trade situation. Yen crosses have been bid, reportedly helped by talk of 'stealth intervention' bids in the mid-76's after confirmation yesterday that the MoF had indeed been in on the sly in the days after the October 31 operation. We give little weight to these operations - they simply represent a minor change in the MoF's methodology to ensure that intervention was a success. We remain of the view that a necessary (but not sufficient) condition for JPY weakness would be for the BoJ to ease policy and expand money supply significantly. In contrast we have seen the BoJ draining liquidity from the market over the past few days. We remain negative on USDJPY and EURJPY. Todays German trade data has consensus looking for a decline in exports; however, given the improvement in the January PMI, it is likely that the decline in exports may be a one-off. Any upside surprise could provide short-lived support for EUR as it confirms that economic conditions in the eurozone are not as bad as once perceived.

EURUSD vs. Germany-Greece 10yr yields

1.475 1.450 1.425 1.400 1.375 1.350 1.325 1.300 1.275 1.250 Aug Sep Oct 11 Nov Dec Jan Feb 12 Ger-Greece 10yr yields EURUSD -12.5 -15.0 -17.5 -20.0 -22.5 -25.0 -27.5 -30.0 -32.5 -35.0

GMT

Country

Release

BNPP Mkt Last

07:00 DE (Dec) 07:00 DE (Dec) 07:30 FR (Jan) 07:45 FR (Dec) 08:00 ES (Dec) 10:15 DE 13:15 CA (Jan) 15:30 US 17:00 CA 18:00 US 21:45 NZ (Q4)

Current Account bn 14.7 EUR Trade Balance bn EUR 14.9 (sa) BdF Bus Survey 96 96 Budget Balance bn -152.7 -90.8 EUR Industrial Prod % (y/y) -8.0 -7.0 Germany sells EUR 4 bln of 5-year Bobls Housing Starts K 195.0 200.2 420000 EIA Oil Invento 0 GoC 2-Year Auction Treasury Auctions 10Year Notes Unemployment Ra % 6.6

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Steven Saywell James Hellawell Kiran Kowshik Michael Sneyd Raymond Attrill Mary Nicola Robert Ryan Drew Brick Chin Loo Thio Jasmine Poh Gao Qi Bartosz Pawlowski Dina Ahmad Diego Donadio Head of FX Strategy, Europe Quantitative Strategist Currency Strategist Currency Strategist Head of FX Strategy, North America Currency Strategist FX & IR Asia Strategy Head of FX & IR Strategy Asia FX & IR Asia Strategy FX & IR Asia Strategy FX & IR Asia Strategy Head of FX & IR Strategy CEEMEA FX & IR CEEMEA Strategist FX & IR Latam America Strategist London London London London New York New York Singapore Singapore Singapore Singapore Shanghai London London Sao Paulo 44 20 7595 8487 44 20 7595 8485 44 20 7595 1495 44 20 7595 1307 1 212 841 2492 1 212 841 2492 65 6210 3314 65 6210 3262 65 6210 3263 65 6210 3418 86 21 2896 2876 44 20 7595 8195 44 20 7595 8620 55 11 3841 3421 steven.saywell@uk.bnpparibas.com james.hellawell@uk.bnpparibas.com kiran.kowshik@uk.bnpparibas.com michael.sneyd@uk.bnpparibas.com raymond.attrill@americas.bnpparibas.com mary.nicola@americas.bnpparibas.com robert.ryan@asia.bnpparibas.com drew.brick@asia.bnpparibas.com chin.thio@asia.bnpparibas.com jasmine.poh@asia.bnpparibas.com gao.qi@asia.bnpparibas.com bartosz.pawlowski@uk.bnpparibas.com dina.ahmad@uk.bnpparibas.com diego.donadio@br.bnpparibas.com

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Foreign Exchange Strategy Wednesday, 08 February 2012 http://www.GlobalMarkets.bnpparibas.com