FX: How to Trade Greek Debt Deal Talks

• FX: How to Trade Greek Debt Deal Talks
• New Week, New Life for Dollar?
• GBP: Busy Week Ahead
• CAD Rallies on Oil and Data
• NZD: Dairy Auction Next Week
• AUD/USD Surprisingly Strong

FX: How to Trade Greek Debt Deal Talks
 
The ongoing negotiations between Greece and her creditors are driving euro traders crazy. One day of progress is followed by another day of setbacks. This back and forth is keeping euro traders on their toes and EUR/USD in a range. While we ended the week with more willingness to compromise between German Chancellor Merkel and Greek Prime Minister Tsipras, the talks will remain in focus on Monday with Eurozone Finance Ministers meeting again to talk about Greece.  At this week's leaders meeting, we know that Germany is open to changing some bailout terms and Greece is willing to keep approximately 70% of the current bailout package. So the main task is to try to agree on the remaining 30% of the package.  It is essential that progress is made at next week's meeting because Greece is running out of time since the current bailout program ends on February 28th.  Greek leaders are motivated because according to local media nearly all of the liquidity available has been absorbed, making it extremely important for the country to look for financing options. While some economists believe that the risk of a Grexit increases with each passing day, we believe that in the next 2 weeks, Greece will ask for an extension and that is where the trading opportunity lies.  
 
For FX traders, there are 2 ways to trade the Greek debt negotiations. You can bet on the talks breaking down and Greece leaving the euro, which it's a risky trade because the chance is low and euro short positions are overstretched.  However the payoff would be huge because a Greek withdrawal from the Eurozone would immediately set expectations for other countries leaving and eventually the dissolution of the euro. If this were to occur, EUR/USD would break through 1.10 quickly on its way towards parity.  Yet the higher probability opportunity is to buy euros on a dip if the currency pair comes into the 1.1250 to 1.1350 range or on a break of 1.1450, which should not occur unless there is clear progress in the talks.  The outcome of the Greek debt negotiations not only impacts the euro but all major and minor currencies.  If a deal is not made, safe haven currencies such as the dollar and yen will outperform, high beta currencies will fall and emerging market currencies will sell off while a deal will lead to profit taking in the greenback and gains for many currencies.  An agreement can be reached if Greece is willing to commit to significance reforms and Europe is willing to award them with gradual debt write-downs.
 
New Week, New Life for Dollar?
 
It has been a tough week for the U.S. dollar, which lost value against most of the currencies due to weaker economic data and profit taking.  After Thursday's surprisingly large decline in retail sales, consumer confidence missed expectations with the University of Michigan consumer sentiment report dropping from its 11 year high of 98.1 to 93.6 on a rebound in gas prices.  While this week's softer reports drove the greenback higher, we believe that the uptrend remains intact and that next week's FOMC minutes could breathe new life in the currency.  Throughout this past week, we heard from many Federal Reserve officials and their message has been consistent - that is, a rate hike is near.  There is growing consensus within the central bank that the economy is ready for a rate hike in the summer or fall and the FOMC minutes will most likely reinforce their view by reviewing the improvements in the economy. Our optimistic view for the dollar leads us to believe that the recent pullback in USD/JPY gives investors an opportunity to buy the currency pair at a lower level.  Aside from the Fed minutes, we have housing and manufacturing reports scheduled for release. While U.S. markets are closed on Monday for Presidents Day, USD/JPY will be in play with Japan's Q4 GDP report due Sunday night. Economists are looking for a sharp rebound but given the decline in spending towards the end of the year, the risk is to the downside for the yen.
 
GBP: Busy Week Ahead
 
Whether or not sterling reaches 1.55 versus the U.S. dollar will hinge on next week's U.K. economic reports.  There's a lot on the calendar to validate or refute the Bank of England's rosy economic and bleak inflation outlook.  Consumer prices are scheduled for release on Tuesday, followed by the employment report on Wednesday and retail sales on Friday.  Overall, we expect sterling to react positively to most of these reports because the BoE made it clear this week that a 2015 rate hike remains on the table. Mark Carney's press conference on Thursday centered on tightening with the central bank Governor saying point blank that the next move by the BoE will be a rate hike.  Sterling soared as a result with GBP/USD rising to its strongest level in 1 month.  We now expect further strength in the pound particularly against currencies of countries easing monetary policy.  The CPI and retail sales reports will most likely echo the forecast changes made by the BoE. If you remember, in their Quarterly Inflation Report, the central bank lowered its 2015 inflation forecast to 0.5% from 1.4% and raised its growth forecast for next year to 2.9% from 2.6%. These changes tell us that policymakers are committed to raising interest rates in 2015.
 
CAD Rallies on Oil and Data
 
All three of the commodity currencies extended their gains today on the back of higher commodity prices and U.S. dollar weakness.  The 2.7% rise in WTI crude prices and stronger than expected increase in manufacturing shipments in Canada drove USD/CAD back below 1.25. Retail sales is the main release on Canada's calendar next week and considering that it is scheduled for Friday, oil prices will drive the currency pair's movements for most of the week.  No major economic reports are expected from Australia and while this week's softer employment report points to another rate cut, AUD/USD has been surprisingly strong.  For New Zealand, the main focus will be on the Global Dairy Auction on February 17th.  If prices rise again, we could see fresh lows in AUD/NZD.