USD continues its rebound in trade weighted terms, gaining stability against EUR and appreciating against EM FX. USD/JPY is now shy of the 109.00 level, with the latest JPY weakness being a function of Japanese Fin Min Taro Aso not ruling out FX interventions. At this point we see possible one-sided FX interventions as unlikely given that such an action would mean that Japan would be coined as a currency manipulator by the US while at current levels, USD/JPY is still overvalued. he outcome of the euro area finance ministers’ meeting was unambiguously positive yesterday, making a clear progress on the fiscal package and contingency measures (ie, introducing an automatic expenditure cut mechanism). In terms of the debt relief, EZ creditor nations stick to the usual toolkit of maturity extensions, interest rate reductions and grace periods, rather than any upfront haircut – see today’s Prophet for more details. While indeed good news and step in the right direction we expect its effect on EUR and risk sensitive European currencies to be limited. This is because (a) concerns about Greece has not been the key risk driver in recent days/weeks, hence limited scope for any relief rally; (b) the effect of the Greece risk factor on EUR has been fading over the past years (recall the lack of EUR downside during the 2015 Greek crisis); (c) back in 2015, it was selected CEE 4 currencies (PLN and HUF) that showed a heightened negative sensitivity to the Greece newsflow. However, with both currencies being weighed down by idiosyncratic issues at this point (politics in terms of PLN, an unclear NBH monetary policy outlook in terms of HUF), any positive spill over effect is likely to be limited.

Price action points to a large scale profit taking move in Emerging Markets FX. The downturn in industrial metals and commodities in general has triggered a re pricing response along with dovish central banks in commodity currencies. AUD and NZD remain weak and in downtrends, though they are now close to important support levels. Asian currencies are slowly losing ground as China fixes CNY lower. SGD and THB are the leaders but KRW and the pack follows losses. Greek concerns have hurt EMEA, PLN, HUF and CZK are also losing ground along with troubled ZAR, TRY and RUB. The larger picture shows us the last two weeks have been one large profit taking/ reversal move but has not really gained momentum to break levels. We now sit at support levels for most currencies and these levels are make or break. Given the current state of commodities in this environment EM strength needs a bit of a push from central banks to come back with some momentum.