Sunrise Market Commentary

• Rates: Syriza wins Greek election, but falls short of absolute majority
  Left opposition party Syriza won the Greek elections. This is slightly supportive for the Bund, while Greek assets could suffer. Contagion to other peripheral markets should be limited with the ECB’s QE-programme in mind.
• Currencies: Euro touches new correction low after Syriza victory
  EUR/USD was still captured in a negative tailspin on Friday as the post-QE repositioning continued. EUR/USD and USD/JPY also spiked temporary lower this morning in a first reaction to the Greek election outcome. However, the losses are moderated and apparently temporary in nature. Will this relatively calm reaction persist?

The Sunrise Headlines

• Late on Friday, a selling wave pushed US equities into the red. The S&P ended with a loss of 0.55% led by weaker materials. This morning, most Asian shares opened lower, but managed to reverse part of their losses to trade mixed into the close.
• With nearly all votes counted, Greek leftist party Syriza gained 149 seats in the 300-seat parliament, just two short of an absolute majority. The leftist leader Tsipras promised yesterday to end five years of austerity, humiliation and suffering. The party leader is expected to start coalition talks today with the small Independent Greeks party.
• Japanese exports grew in December at their sharpest pace in a year helped by the weaker yen and improving overseas demand led by the US and China, providing some hope that they are finally picking up. Imports grew 1.9% Y/Y, in line with expectations.
• BoE’s MPC member Forbes said in an interview she is optimistic about the global economy’s prospects given robust US growth and the potential for cheap oil to boost consumption and investment and added it could trigger the need for rate increases in the UK sooner than market expectations of the middle of next year.
• Brent crude oil prices ($48.15/barrel) are under pressure this morning as the Greek election outcome raises uncertainty. The US benchmark, the WTI oil price is close to a test of the recent lows. Copper is trading sharply lower too this morning, testing the 5.5 year lows.
• Today, the eco calendar contains only the German IFO business climate indicator. Eurogroup Finance Ministers meet in Brussels

Currencies: Euro Touches New Correction Low After Syriza Victory

EUR/USD

(Currency) markets react cautious to Greek election result

On Friday, the market repositioning after the ECB’s QE announcement continued. On the currency market, EUR/USD but also EUR/JPY headed south at an impressive pace. USD/JPY is struggling too, but stayed in well-known territory (118 area) for most of the day. A poor stock market performance later in the US session triggered some dollar selling. EUR/USD rebounded in the 1.12 big figure. USD/JPY closed the week below 118. However, the basic trend on the currency market remained euro weakness.

During the weekend, the focus of the markets turned to the outcome of the Greek elections. Left-wing Syriza just fails to secure an absolute majority. Even so, the party will put its request for debt reduction on the table in negotiations with Europe. This might cause institutional uncertainty on the political scene in Europe. Even so, the first reaction in Asia is moderate. EUR/USD set a new correction low in the 1.11 area. However, the loss compared to Friday’s close is already reversed. EUR/USD is again trading in the 1.12 area. A similar reaction is seen in several Asian equity markets and in USD/JPY. The pair touched a risk-off correction low in the 117.3 area early in the session but is rebounding to the 118 area. In an interview in Davos, BOJ’s Kuroda suggested that the Bank has still several options to ease policy further if necessary. Those comments might have prevented a further yen strengthening at the start the new week. Japanese trade data were stronger than expected.

Today, there are no eco data on the calendar in the US. The focus will be on Europe. In Germany, the IFO business climate indicator will be published. A further rebound is expected and we see risks for a consensus-beating outcome. It is not evident to see the impact on the single currency. A positive outcome should in theory be positive for equities. However, of late there was often an inverse correlation between equities and EUR/USD. How will the arrow work this time? For now, we don’t expect a big/lasting impact from the IFO on the euro. The focus of markets will be on the political developments in Greece. In this respect, there will be a lot of comments on the election outcome on the side-lines of the meeting of the Euro group Finance Ministers. In a first reaction, one can expect that most other EMU countries will insist that Greece will have to comply with the current agreements. However, should this really be a surprise for markets? We also keep an eye at the reaction of the European equity markets. A moderately negative reaction is possible. However, will this hurt the euro and trigger additional losses? As said, this would break the recent inverse correlation between European equities and the single currency. A substantial widening of intra-EMU bonds spreads could do more damage for the euro. So, we start the day with a rather neutral bias for EUR/USD. This morning’s price action at least suggests that further euro losses in the wake of the Syriza victory are no done thing.

In the wake of the ECB’s QE decision, our strategy was not to try to catch the failing knife in EUR/USD even as technical indicators pointed to heavily overbought conditions. We hold on to that view for now. A lot of investors are probably still wrong-footed by the speed of the recent decline. So they might still try to limit the damage in case of an uptick. So, we have to wait for more concrete signs on a real bottoming out process before considering a change in tactics on EUR/USD. For USD/JPY we maintain a cautious bias. The ongoing downward pressure on yields in most industrialised countries may continue to cap the topside. In addition, at some point, Asian/Japanese equity markets might become nervous on the competitive declines/devaluations in the rest of the world. A risk-off correction for this or whatever other reason might bring the yen in the picture. EUR/JPY already cleared the EUR/JPY 134 support area and is extensively testing the 131.22 support (Dec 2013 low + MT Neckline). The test is ongoing, but there is no sustained break yet The comparable range bottom in USD/JPY stands at 115.57. This level is still quite far away, but we keep an eye on it.