EUR: Not Impressed by Greek-EU Can Kicking

• FX: Yellen vs. Greece, What's More Important?
• USD: All Eyes on Yellen Next Week
• Sterling Pulls Back on Weaker Retail Sales
• CAD: Hit by Weaker Retail Sales
• AUD Soars on Improvement in Risk Appetite
• NZD: Shrugs Off Lower Commodity Prices

 
EUR: Not Impressed by Greek-EU Can Kicking
 
Based on the EUR/USD's performance today, investors were not excited or impressed by the Eurogroup's decision to provide Greece with a 4-month bailout extension The lackluster reaction has to do with the fact that the details have not been hashed out, leaving room for another breakdown in the debt deal negotiations. On Friday, Greece asked for a 6 month extension and the Eurogroup granted a 4 month reprieve. However Greece would need to provide a list of bailout conditions on Monday. When the list is submitted, the Troika will decide by Tuesday morning if it is sufficiently comprehensive to use as a starting point for reforms and if it is, then procedures will be taken towards a broader agreement.  We have long been optimistic that an extension will be made and we still believe that both parties will reach an agreement to restructure Greek debt avoiding a Grexit but we along with the broader market are not happy that the can has been kicked down the road. There's still plenty of room for another screaming match, today's announcement fails to eliminate the risk of a Grexit and more immediately, Greek headlines will continue to affect how the euro and other major currencies trade in the coming week.  We are still waiting for Greece to come up with their list of reforms and for the approval from the EU.  Considering the significance that Greece has for the entire Eurozone, it should receive greater focus than Janet Yellen's semi-annual testimony on the economy and monetary policy.  In all likelihood, the Fed Chairwoman will dance around the question and leave the market guessing about the timing of a rate hike.  Meanwhile it still appears that Germany would be ok with a Grexit but the European Union and France would like to avoid it at all costs.  With a billion euros flowing out of Greece in the past 2 days, there is a significant amount of urgency for Greece to provide a satisfactory list of reforms. EUR/USD traders are waiting for the final approval early next week before taking the currency pair up to 1.15.
 
USD: All Eyes on Yellen Next Week
 
There was very little consistency in the performance of the dollar today because the focus was on Greece and not the U.S. economy.  The greenback traded higher versus the euro and British pound but moved lower against the Yen. This week, long dollar positions took a hit after policymakers showed a preference for rates remaining near zero for a longer period of time according to the FOMC minutes.  Weaker housing and manufacturing data reinforced their patience because even though the Markit PMI Manufacturing Index moved higher, all other manufacturing reports surprised to the downside.  A June rate hike is off the table but the chance of summer tightening was slim to begin with. We expect the Fed to raise interest rates this year but not until the fourth quarter. In the near term the odds of a 2015 rate hike will depend upon Janet Yellen's semi-annual testimony on the economy and monetary policy next week. If she emphasizes the need for patience, rate hike expectations will decline but if she focuses on the improvements in the economy and the central bank's plan to normalize monetary policy, not only will yields rise but the U.S. dollar will increase in value as well. At Yellen's last post monetary policy meeting press conference in December, the central bank said it would be patient and indicated that this is consistent with their previous view that rates will remain low for a "considerable time." Yet the dollar traded sharply higher that day because Yellen said the Fed would not move on rates for at least 2 months which was a more aggressive timeline than most investors anticipated.  Since that meeting, inflation has fallen further, global uncertainties increased and data with the exception of the labor market report took a turn for the worse.  In other words, Yellen has plenty of reasons to be patient and if she chooses this course, the dollar will suffer.  We doubt that the central bank will stick to the "at least 2 months" timing provided at the last meeting.  Even if Yellen is pressed by members of Congress it would be smarter to provide less transparency than to back themselves into a corner by providing a timeline on when rates could rise.
 
Sterling Pulls Back on Weaker Retail Sales
 
Surprisingly weak consumer spending in the month of January halted the rally in the British pound.  Despite the decline in the unemployment rate and an increase in wages, retail sales fell 0.3% at the start the year.  January is typically a softer month for spending and so excluding auto and gas purchases, retail sales dropped 0.7%. Lower gas prices last month led to a pickup in energy usage but aside from the seasonal post holiday dip in spending, retail sales have also been hampered by lower prices.  Earlier this week we learned that CPI dropped by the largest margin ever but even with today's weaker report, we still believe that the Bank of England is on track to raise rates towards the end of the year. More importantly, we believe that the latest pullback in sterling represents an opportunity to buy the currency pair at a lower level.  There are not many U.K. economic reports scheduled for release next week, which means that the performance of sterling will hinge upon the market's appetite for U.S. dollars and euro.   Just remember that the overall outlook for the U.K. remains positive so if there is a rally in EUR/GBP, chances are, it may not last.
 
CAD: Hit by Weaker Retail Sales
 
The Canadian dollar was hit from all sides today with oil prices extending its move lower and retail sales falling sharply in the month of December. Although labor market conditions improved last month, the 40% slide in crude prices in the last 3 months of the year took a major toll on business activity and consumer sentiment. It even motivated the Bank of Canada to cut interest rates in the month of January. Therefore it was no surprise to us that consumer spending fell steeply at the end of the year. Retail sales dropped 2%, the most in 4 years with spending ex autos falling an even steeper -2.3%.  USD/CAD has done a great job of holding 1.24 this past week and we feel that it should only be a matter of time before the currency pair tests 1.26. Next week's CPI report could do the trick. Aside from the inflation data, comments from Bank of Canada Governor Poloz could also pressure the currency.  Meanwhile the Australian and New Zealand dollars ticked higher as risk appetite improved.