20 Haziran 2011 Pazartesi

Commentary by Kathy Lien: FX: What to do While Waiting on Greece

TODAY'S BIGGEST PERCENTAGE MOVERS

CHF/JPY +54 pips +0.58
EUR/NZD +74 pips +0.44
EUR/AUD +57 pips +0.43

THE STORIES IN THE CURRENCY MARKET

EXPECTATIONS FOR UPCOMING FED MEETINGS

CURRENT US INTEREST RATE: 0.25%
06/22 Meeting08/09 Meeting
NO CHANGE56.0%53.3%
CUT TO 0BP44.0%41.3%
HIKE TO 50BP0.0%5.4%
** PERCENTAGES MAY NOT ADD UP TO 100% BECAUSE OF THE PROBABILITY OF LARGER OR SMALLER MOVES BEYOND THOSE SHOWN ON THIS TABLE

FX: WHAT TO DO WHILE WAITING ON GREECE

Everyone’s focus this week is on Greece and rightly so because of global ramifications of the country’s troubles, but with little progress being made at this weekend’s Finance Ministers meeting, the prospect of groundbreaking developments occurring before the EU leaders meeting on Thursday is slim. In fact, based upon the statement released after the 7 hour Eurozone Finance Ministers meeting, European officials have effectively given Greece until early July to sort out their political mess and get their austerity measures approved and underway.  July 3rd appears to be the new drop dead date for Greece as European officials will be holding a meeting that day to decide whether Greece will receive their next tranche of aid and any additional support. Between now and then, investors may find themselves doing nothing but sitting idly waiting for breaking news from the region (more on the euro section of our commentary) but just because the Greek Tragedy drags out for longer than most of us would like does not mean that the quiet trading experienced today will become the norm over the next few days.

Aside from the no confidence vote in Greece tomorrow, Chinese PMI numbers are also scheduled for release later this week along with the FOMC rate announcement. The Federal Reserve’s monetary policy meeting begins tomorrow and it will end with another press conference by Bernanke at 2:15pm ET on Wednesday. Weak U.S. economic data has kept the possibility of QE3 alive but we believe that even though more stimulus is possible, it is not very probable. The big question is whether Chinese economic data and comments from Bernanke will spark another risk averse move that sends investors back into the arms of low yielding currencies.  Given the momentum in the global economy, the odds certainly favor more caution than optimism which may be part of the reason why the Swiss Franc continues to perform so well. While waiting on Greece, it will be important to watch 3 things – the Swiss Franc, the TED spread and the VIX. The franc will tell us whether investors remain nervous and today’s price action indicates they are even though the euro is unchanged against the U.S. dollar. The TED spread measures the difference between the LIBOR rate and 3 month Treasury bills. The wider the spread, the more premium banks require to lend to each other. The TED spread rose slightly today which suggests that banks are more nervous about counterparty risk.  The VIX on the other hand which measures the volatility in the stock market declined which implies that equity traders feel more comfortable with taking on risk. In the coming days, it will be important to keep an eye on these various instruments because they can provide insight on days when the sentiment in the market is unclear. The only piece of U.S. data is existing home sales and unfortunately for risk, sales are expected to have declined sharply in the month of May. 

EUR: THE LATEST ON GREECE

The euro ended the North American trading session unchanged against the U.S. dollar. The details out of the EU Finance Ministers Summit this weekend has been slim but in principle, Germany, France and the ECB have agreed that voluntary rollover of debt is the way to go. There is no question that it will be a challenge to convince bondholders to rollover their debt but with the right terms, it could happen. Investors are also hopeful that Greece will receive its fifth bailout tranche in a timely fashion. EU leaders have set a meeting for July 3rd to decide on whether Greece has met the terms needed to receive their next bailout payment. European leaders are also stocking up ammunition in case another country like Spain needs to tap the fund. Klaus Regling, the head of the European Financial Stability Fund announced this morning that the EFSF Guarantees will be increased from EUR440B to EUR780B. However the gains in the EUR/USD should be limited because the communique from the EU Finance Ministers meeting also said additional aid will be contingent on Greece passing austerity measures and unfortunately political troubles in Greece will make a deal very difficult to achieve. Greek Prime Minister George Papandreou’s no confidence vote will be held on Tuesday and even if he survives the vote, the Greek government still needs to sign off on the measures needed to secure a deal and avert a default. At this point, there is too much political infighting to make that a smooth process and it is very unlikely that any meaningful progress will be achieved by the end of the EU Summit which means the Greek Tragedy will continue into July, leading to more volatility in the EUR/USD. As a result, it will also be a challenge for the EUR/USD to hold onto its gains in the coming days. The German ZEW survey is scheduled for release tomorrow and there is a good chance that sentiment may have been dashed by the sovereign debt troubles in the region. This morning’s Eurozone economic reports showed inflationary pressures easing with German producer prices holding steady in the month of May. The current account surplus for the region also deteriorated significantly, blowing out to –EUR6.5B from –EUR2.0 billion. 

GBP: WATCH OUT FOR THE BOE MINUTES

The British pound held steady against the U.S. dollar and euro as U.K. Treasury Minister Alexander pledged to not contribute any additional funds to a second bailout for Greece. The U.K. has its own host of problems with prices in some areas of London rising to record highs, pushing struggling homeowners out of the city. According to Rightmove PLC, house prices rose 0.6 percent in June which was a slower pace of growth than the previous month. The divergence between economic performance and house price growth in certain parts of the country highlights the challenges faced by average Britons. The minutes from the most recent Bank of England meeting will be released this week and there is a good chance that the minutes will continue a far more cautious tone than previous months. Last week’s data showed weakness in the labor market and deterioration in retail sales. From the perspective of growth, the central bank should be thinking about easier and not tighter monetary policy. In May, consumer price growth rose 0.2 percent which was much slower than the 1.0 percent growth experienced the previous month. On an annualized basis, CPI held steady at 4.5 percent but core CPI growth eased to 3.3 from 3.7 percent which indicates that inflation could be trending down and not upwards. As a result, we expect the minutes to contain a more cautionary tone.     This will also be the first meeting where Broadbent replaces Sentance as an MPC voter and based upon his comments, he does not share the excessive hawkishness that Sentance is known for. If the BoE minutes show a different pattern this month than in the past, which there is a very good chance of we could see some sterling centric volatility in the currency.

CAD: RETAIL SALES ON TAP

Although equities traded higher today, the sell-off in the Canadian, Australian and New Zealand dollars suggest that investors have not grown all that optimistic since last Friday. New Zealand economic data was better than expected with service sector activity accelerating slightly in the month of May. As Finance Minister English pointed out, the economy is being supported by demand from Asia and Australia. If not for the latest aftershocks, there was a reasonable chance that the RBNZ would raise interest rates before the end of the year. However, we now need to see a few more months worth of New Zealand data to get a sense of how the country is doing since the last tremors. The Canadian dollar held steady ahead of tomorrow’s retail sales report. Consumer spending is expected to rebound after a particularly weak March but given the decline in wholesale sales and the weaker than expected job growth, we are skeptical of a potential pickup spending. The Australian dollar on the other hand trended lower despite reports that Russia’s central bank wants to add more Australian dollars to their reserve holdings. Overall it certainly seems that risk appetite is the primary driver of fluctuations in the commodity currencies. For the most part we expect that to remain the case except for the CAD which should see some Canadian centric volatility on the heels of the retail sales report.

JPY: TRADE DEFICIT BALLOONS

It was a mixed day for the Japanese Yen, which traded lower against all of the major currencies except for the Australian and New Zealand dollars.  Japan released trade balance numbers last night that showed the country’s deficit worsening in the month of May. For Japan, this is a serious problem because their economy depends on exports. Unfortunately a 10.3 percent decline in exports cause the deficit to widen to JPY853.7billion which is the second largest deficit ever. The trade deficit shows that the country has not recovered the earthquake in March at all. Three consecutive months of weaker trade activity reflects supply chain disruptions at home and weaker demand abroad. Although this data is worrisome, having experienced such a significant pullback, there is a good chance that the economy may recover from here on forward. Convenience store sales jumped 5.7 percent in May which is a sign of stronger domestic activity. The Cabinet’s monthly economic report will be released tomorrow and it should provide greater insight into how the central bank believes the economy is faring. 

USD/CAD: Currency in Play for Next 24 Hours

USD/CAD will be our currency pair in play tomorrow. Canadian retail sales are scheduled for release at 8:30 AM ET / 12:30 GMT followed by U.S. new home sales at 10:00 AM ET / 14:00 GMT.

For the past month, USD/CAD has been trapped in a relatively tight 200 pip trading range. Towards the end of last week the currency pair broke the top of the range to rise to a high of 99 cents but has failed to hold above that level. This leaves USD/CAD squarely in the range trading zone, which we determine using Bollinger Bands. The closest level of support is at 0.9735, where we have the first standard deviation Bollinger Band and the 100-day SMA. Below that is the June low of 0.9665, which also coincides with the 50-day SMA. Resistance on the other hand is up at the June high of 0.99 cents and above that will be the psychologically significant level of parity 1.0.

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