USD/JPY Breaks 120, Further Gains Likely But...

• USD/JPY Breaks 120, Further Gains Likely But....
• EUR Ticks Up on Reports of Greek Deal
• GBP: What to Expect from the BoE Quarterly Report
• Fate of AUD Hinges on Employment Report
• USD/CAD Extends Gains on Lower Oil
• NZD Retreats Amidst Weaker Data

USD/JPY Breaks 120, Further Gains Likely But....

For some time now we have been looking for USD/JPY to test and break 120 and today the currency pair took out this level with ease.  Investors bought dollars aggressively despite the lack of U.S. data as uncertainties abroad makes the greenback more attractive.  Between the Greek debt deal talks, Ukraine peace talks in Belarus, tonight's Australian employment report and the upcoming Bank of England Inflation report, there are a lot of event risks on the radar.  Most importantly, there's very little consensus on the outcome of each of these events, which is part of the reason why investors are seeking safety in the greenback where the prospect of Fed tightening is becoming increasingly clear.  This morning Dallas Fed President Fisher said that early and gentle rate increases would be wise.  This follows yesterday's comments from Fed President Lacker who believed that June was an attractive time to raise rates.  Based on these comments and our general outlook for US monetary policy, we believe that USD/JPY will hit and exceed last year's high of 121.85.  However whether that happens this week or next will hinge in large part on tomorrow's US retail sales report as well as Greek debt negotiations and it's impact on risk appetite.   Economists are looking for consumer spending to decline in the month of January but mostly due to lower gas prices because excluding auto and gas purchases, spending is expected to grow by 0.5%. However according to Johnson Redbook, spending in January was weaker than December so there's risk of a downside surprise.  Of course, job growth was very strong so that could offset any weakness. Either way, there is risk of a downside surprise in tomorrow's report that could force USD/JPY lower and if that happens we will look at it as an opportunity to buy the currency pair at a lower level. 

EUR Ticks Up on Reports of Greek Deal

The euro traded slightly higher against the U.S. dollar on "unconfirmed reports" that a deal with Greece has been reached in principle and it will include Greece staying within the EU. Bailout program. The deal needs to be confirmed of course and when it is, we expect a more pronounced short squeeze in EUR/USD.  In the meantime, the blowout in peripheral yields signals that investors are bracing for the worst.  We are optimistic that a deal will be reached but a decision may not be made that quickly especially as we wait for news flow out of the leaders meeting on Thursday.  Fundamentally, it is in everyone's interest to avoid a Greek default and more importantly a Grexit but Europe does not want to let Greece off the hook so easily for their irresponsible fiscal decisions. There is no question that the talks are very important and given the consolidative price action in euro, the outcome should have a significant impact on EUR/USD. If Greece and Europe continue to play their game of chicken waiting to see who blinks first, the threats from both sides will keep the euro under pressure but if there's any sign of progress, we expect a particularly aggressive short squeeze in the EUR/USD.

GBP: What to Expect from the BoE Quarterly Report

The Bank of England's Quarterly Inflation report is one of the U.K.'s most important event risks.  As indicated by its name, the report is released on a Quarterly basis and this rarity contributes to its significance but the main reason why it can be extremely market moving for sterling is because the central bank will oftentimes use the report to signal potential changes in monetary policy.  The market is currently divided on when the BoE will raise rates and the tone of the report along with changes in economic projections will go a long way in settling that score.  Based on the recent price action of the British pound, sterling traders are clearly looking for a positive release with the improvements in PMIs supporting their views.  However the steep decline in oil prices also puts significant pressure on inflation and with CPI hovering at a record low of 0.5% in December, the central bank could issue its first ever deflation forecast.  The question now becomes which one the central bank downplays.  If they forecast negative inflation but sound relatively relaxed and say that it will be temporary, any knee jerk decline in GBP/USD could be recovered quickly.  However if they don't make any positive growth comments and instead suggest that monetary policy could be held steady for a longer period of time because of lower inflation, sterling could erase its recent gains against the dollar.

Fate of AUD Hinges on Employment Report

The Australian, Canadian and New Zealand dollars all traded lower against the greenback today. Although part of their weakness was due to a stronger U.S. dollar, lower commodity prices and the fear of weaker data also contributed to the move.  Oil prices dropped below $50 a barrel and the recent reversal in crude has weighed heavily on the Canadian dollar. USD/CAD extended its gains today and appears poised to retest its year to date highs near 1.28.  The Australian dollar on the other hand appears poised to test its recent lows versus the U.S. dollar. Despite a sharp rise in home loans and consumer confidence, the currency traded lower on the fear that tonight's employment report could raise the risk of another interest rate cut.  The market is pricing in another round of easing this year but losses in AUD have been limited since the last rate cut so if the employment rate is exceptionally weak, the flood gates could open, washing the Australian dollar down.  However if job growth beats expectations, the 0.7620 support level in AUD/USD could hold.  As for the New Zealand dollar, it traded lower on the back of lower credit card spending and house prices.