US Dollar, Japanese Yen May Extend Gains as G7 Disappoints on Greece Bailout

Key Overnight Developments

• Japan’s Merchant Sentiment, Export Gains Fall on Deaf Ears
• Euro, British Pound Decline as Safety Demand Boosts Dollar

Critical Levels



The Euro and the British Pound traded lower, slipping as much 0.3% and 0.4% respectively as lackluster risk sentiment continued to boost the safety-linked US Dollar. We remain short EURUSD at 1.4881 and GBPUSD at 1.5765.

Asia Session Highlights



Japan’s Current Account surplus narrowed to 900.8 billion yen in December from 1103.0 billion as imports expanded 1.5% while exports declined -0.2% from the previous month. Looking past month-to-month volatility at the broader trend, however, exports added 11.7% from a year before to mark the first positive reading in 15 months and the largest since October 2007. Still, the data did not prove market-moving as traders remained preoccupied with risk trends. Further, the outcome largely reflected the same underlying themes as the Merchandise Trade Balance report released two weeks ago and so has likely been priced into the Yen exchange rate by now. Separately, January’s Eco Watchers Survey of retail service providers revealed merchants’ outlook for the coming two to three months improved the in 10 months, but this too passed without fanfare.


Euro Session: What to Expect



The economic calendar is fairly tame in European hours. Switzerland’s Unemployment Rate is set to rise to 4.6% in January, the highest in over two decades and marking the eighth consecutive month of deteriorating labor conditions. December’s Retail Sales report is also set to cross the wires.

On balance, scheduled releases are likely to fade into the background once again as broad trends in risk sentiment remain the dominant driver of price action across currency markets. The G7 finance ministers did not release a formal communiqué following the weekend’s summit in Canada, but the details that have emerged from the meeting revealed no plans for a bail-out of Greece and other debt-ridden southern European economies. Hopes for such a rescue engineered a sharp upswing on Wall St in late Friday trading, with the S&P 500 recovering from a 1.8% selloff in the last two hours of the session to narrowly finish the day in positive territory. French Finance Minister Christine Lagarde said European officials have “confirmed the substance and significance” of Greece’s budget deficit reduction plan, which means nothing meaningful has been agreed to for the time being. Stocks sold off in Asia and US equity index futures are trading down 0.4% to start the week, hinting that further risk aversion will continue to buoy the US Dollar and Japanese Yen in the near term.

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