Forex - Greek Worries Still Linger while Portugal Risks Suffering a Slow Death

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Risk appetite continues to be shaky and markets remain nervous. Asian regional indexes are slightly higher, with European equity markets following. Early participants were abuzz with rumors that German Chancellor Merkel would resign, perhaps driven by a Time piece suggesting she was losing support of coalition partners. However, the rumors were quickly dismissed, with little linger effect FX. At yesterday's ECB meeting, monetary policy and exit strategies took a back seat to EU members' mounting economic problems. When asked about Greece's rumored exit from the Eurozone, ECB president Trichet rumbled 'I do not comment on absurd hypotheses.'However, in the same meeting he also made it clear that the central bank would not make any concessions to any one country. In fact, Trichet did suggest that individual countries would need to handle their own problems, as the ECB would not adjust its collateral framework. Although, there was a slight shift from their hard-line stance that any ratings downgrade might preclude Greece's securities from being used as eligible collateral at the ECB. The ECB would ideally like to move back to its standard operating framework of accepting single -A from BBB- which would currently preclude Greece. In addition, the EMU doesn't have any established institution that could possibly step in should members have a hard time accessing capital markets. It seems that we are in the minority and believe this is a major issue for the EUR and not just a temporary problem. Yesterday's official release of Greece's plan to achieve a three year convergence towards the Stability and Growth Pact's deficit targets seem very aggressive - verging on overly optimistic. EU policy makers pushing Greece towards fiscal austerity seems improbable, considering past account indiscretions. In reaction to the latest commentary, Greek sovereign spreads widened further and the EUR failed to gain against the greenback, despite broad USD selling yesterday. In the short term nervousness over Greece and the rest of the PIGS (highlighted by Moodys statement that Greece & Portugal risked an economic slow death) will underpin EUR strength against the USD. And on a side note, Trichet reiterated the ECB support for the US strong dollar policy. Later in the day, US retail sales continued what has been a string of disappointing data in January. Retail sales fell 0.3% vs. 0.5%,exp in December. However, November was revised up to 1.8% from 1.3%. There was also an uptick in initial jobless claims, increasing to 444k vs. 437k exp. The USDJPY sensitivity to US data (especially negative surprises) impeded the pair's recently growing bullish drive to 92.00. Today's US industrial production (expected growth) will be critical in our expected belief of continued JPY weakness. Markets will also be cautious watching the first major US banks Q4 earning release, which will be followed by a heavy lineup next week. Financials earnings are expected to show strong results and if the negative collation with the USD continues, we could see some short term USD weakness.

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