EURO Strength Falls Under BoJ Spell

The single currency or EUR has surged to a new seven-month high after S&P’s upgraded Greece five-notches to B-minus from selective default. The credit agency seems to be trying to send a signal that perhaps the worst of Greece’s problems were over. Mind you, tell that to the local Greek inhabitants who still cannot fund some the basic necessities.

With little to hold onto so deep into the holiday season, investors remain warmed by potential progress in the US budget deficit talks. There are further signs that the Democrats and Republicans are willing to come to a compromise. The open dialogue seems to have extended the ‘spring’ step in risk appetite and the up-tick in global bourses for now. The on/off again “Cliff” dialogue continues to have an impact on risk sentiment as we reach the mid-point of the final tradable week for this year.

Data, when reported this month, is having a bigger impact on these liquidity-constrained markets. This morning’s German business confidence report brightened a few extra people’s December. The German Ifo index came in at 102.4 compared to expectations of 102 on the month, and followed the previous months print of 101.4. It was this number that some ECB policy makers got all excited about at this months central bank meeting.

Euro-members are focusing on the indexes positives after it happened to register its second positive print after six-consecutive months of decline in November. It seems that German companies are more confident about their future. The report follows firmly in the footsteps of the sharp rise in the ZEW economic sentiment for Germany. This is certainly some added proof that the EUR’s largest economy is on the road to rebounding early next year following a weaker Q4. If anything, the report leans towards stabilization rather than suggesting things are positive on growth.

The BoE minutes release this morning recorded that the nine-man panel voted unanimously to the leave the O/N benchmark interest rate at +0.5% this month. However, there was the usual dissent (8-1) that saw a stronger case for further expansion to the ‘Old Lady’s’ bond buying stimulus program (+GBP375b). The BoE have given the distinct impression that they are in no rush to change things up. They have yet to feel the full impact of the latest round of QE and that the early signs of FLS (funding for lending scheme) require more quarter-data gathering. The view on growth and outlook are as expected; inflation is to fall back to target while growth remains subdued.

The BoE is lacking reporting on the growth expectations side. This is probably a purpose ploy by policy makers who seem to be very much concentrating on the ‘now’ rather that forward optimism of growth. Why? It may suggest that any further downside surprises to UK growth could open again the stimulus door, and this maybe despite elevated inflation. The FLS data or lack of will probably keep a sidelined BoE until at least the arrival of the new Governor Carney in the summer.

So far this market, or the single currency, has show-limited reaction to the German Ifo beating estimate earlier this morning. Despite the decent data, speculators continue to sit on long EUR positions, focusing on EUR/JPY, as the market waits for BoJ rate and policy announcement this evening. With the resounding LDP Japanese electoral victory at the weekend, market expects a strong influence on BoJ monetary policy decisions going forward. EUR outright on the topside, at 1.33, there are supposed further option barriers, while strong speculator bids build near 1.32, ahead of the supposed ‘real’ money again.

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