With risk easing, dollar still suffers

  • Risk comes off and the USD still suffers
  • Greece passes its test – is the euro on its way to 1.5000?
  • Is the BOE getting more dovish?
  • Steady RBA cash rate…for now
  • RBNZ likely to remain on hold for an extended period
  • Key data and events to watch next week

Risk comes off and the USD still suffers

Last week we suggested that the strength of the global recovery remained very much in doubt despite the G8’s optimistic pronouncement and that risk assets (stocks and commodities) were set to weaken further, and that this would support the USD. Stocks and many key commodities did decline on the week (S&P 500 closed below the daily Ichimoku cloud bottom at 1305/1306; CRB commodity index potentially forming an ‘Abandoned Baby Top” bearish reversal pattern on daily candles), but the USD lost further ground anyway. USD weakness is clearly attributable to fresh US data disappointments that have rekindled talk of another round of Fed asset purchases (QE3). We think QE3 is highly unlikely, but that won’t stop markets from speculating on it, which will keep pressure on the USD until we get some fresh indications from the Fed one way or the other (watch for Bernanke speaking on Tuesday). Also, Congress continues to dither on raising the US debt limit, which led Moody’s to warn of a potential downgrade to US ratings unless progress is made soon, adding further pressure to the greenback. Until a deal is reached, the political stalemate will also weigh on the buck.

But USD weakness was not equally distributed. In particular, we would note the buck was barely changed against the commodity currencies (AUD, CAD, and NZD), suggesting to us that commodity-related markets remain vulnerable. Indeed, USD weakness is typically associated with risk asset (stocks and commodities) price gains and that this did not happen reinforces our view that risk sentiment remains quite vulnerable. In this environment, our preference remains to look for opportunities to get short risk assets on remaining strength, potentially in select JPY-crosses (see the latest Weekly Strategy).

The star performer of the past week was clearly the EUR, which gained against all major currencies except ZAR. The resolution of the latest chapter in the Greek debt saga has given the EUR a healthy lift, but we will be watching closely to see if the pace of recent gains is sustained, or whether NFP-related excessiveness was too extreme. The ECB is meeting on Thursday and the expectation is that Trichet will signal a July rate hike using the ‘strong vigilance’ code words. The single currency seems most likely to remain supported in the run-up to the ECB meeting (barring any major peripheral turmoil over the weekend—see below), but if Trichet fails to signal a rate hike next month, EUR is likely to beat a hasty retreat a la the last meeting on May 5.

Greece passes its test – is the euro on its way to 1.5000?

After a month-long review the Greek Finance Ministry said that the EU/IMF and ECB had concluded “positively” on Friday. While there was little detail on what exactly was positive, it effectively means that Greece is likely to receive the next tranche of bailout funds at the end of this month and is also in the running to get a second bailout rather than return to the capital markets next year.

It is likely that Greece has signed up to even more austerity measures and asset sales to try to bring down its debts organically, rather than having to borrow more money. This makes the public workers strike scheduled for Saturday likely to be the first of many in the coming weeks.

But what is most important to Greece right now is the EU and how supportive it is of Athens . Three dates in June are crucial. On 20th June the Eurozone finance ministers meet and Greece is likely to be top of the agenda. On the 24th European leaders meet, where they are likely to agree to a second round of financial support for Athens ; then on the 29th the IMF should release its next tranche of bailout funds.

It’s a crucial month for Athens , but after today’s announcement things have become much easier for the Southern European nation and its bond yields actually fell at the end of last week. This gave the euro the green light to rise above 1.4500 on Friday versus the greenback. Investors are rushing into the single currency after signs that the US economy is faltering as well as a cooling in financial pressure in the periphery.

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