Dollar Suffers Little Risk, Euro-Demand Post Greek Election
Dollar Suffers Little Risk, Euro-Demand Post Greek Election
Euro: New Democracy Receives Top Vote, Now What?
British Pound Finds Little Relief in Crisis Spread Fear
Swiss Franc Doesn’t Budge from 1.2000 EURCHF Floor
Japanese Yen Slide Uneven, Unconvincing
New Zealand Dollar Extends its Rally, Trade Data to Precede GDP
Gold Recovers Footing after Early Morning Tumble
Dollar Suffers Little Risk, Euro-Demand Post Greek Election
Risk appetite was up on the day and the Euro-area dodged an immediate financial crisis with the Greek vote; and yet, the dollar closed higher Monday. As a safe haven that is particularly sensitive to the level of panic in the system, we would expect the relief to translate into immediate selling pressure. The hesitance from the greenbackto give up hard-won ground is a reflection of a few things: the questionable state of sentiment after the weekend’s headline risk; expectations for the next big-ticket item on our docket and perhaps a more deep-seated belief that the strategy of short-term fixes to answer long-term problems is finally losing its effectiveness.
Though momentum has shifted for the Dow Jones Dollar Index after it retraced more than a third of the May to June rally, there is still a prevailing fundamental current that helps curbs unfavorable corrections while simultaneously feeding the need to deleverage risk positioning. This is the underlying sentiment that has smothered a response of irrational exuberance that would have previously driven speculators to bid euro and all ‘high return’ assets after it became clear that a pro-bailout coalition would likely take the helm in Greece (more on that below). Rather than being swept up in a short-term yield run that would carry the most afflicted assets higher (and leave the dollar ravaged), market participants are deferring to a medium-term reality where there is no genuine improvement – perhaps a sign of diminished speculative interest.
Another important aspect of the dollar and capital markets’ restraint this past trading session is a further distraction in forthcoming event risk: the Fed rate decision. On Wednesday, the central bank will finally signal to the market whether it will relent to or hold out against calls for further stimulus. The belief that another program of support has been building, but the Greek vote takes some of the edge off and there are serious questions as to the effectiveness of further stimulus – in both encouraging growth as well as fostering risk appetite. More on scenarios tomorrow.
Euro: New Democracy Receives Top Vote, Now What?
We can look to the headlines for the outcome of the Greek vote and what it means for the markets, but it is perhaps better to begin our evaluation with the performance of the euro itself. The shared currency was down against all but one counterpart (the unflappable Swiss franc) through Monday’s close – not the performance of a promising fundamental turn. For the numbers, pro-bailout New Democracy picked up nearly 30 percent of the vote (and the additional 50 seats in parliament that comes with it) while Syriza won approximately 27 percent. This is still not resolved as a coalition is needed for a majority and Pasok is initially holding out for a deal with ND with a hope that a four-party coalition can be formed. That would be ideal, but won’t likely happen. We will likely see two or three party alliance formed in the upcoming session. And that puts us right back at square one: Greece in recession, trying to implement harsh austerity. Moving forward, euro traders will be tapped in to any meaningful developments from the G20 (commentary won’t do) and we have Spanish, Greek and EFSF bond auctions on deck.
British Pound Finds Little Relief in Crisis Spread Fear
From a fundamental standpoint, one of the best-positioned currencies for the otherwise lackluster Greek vote outcome is the sterling. As the most at-risk currency to a spread of the Euro Zone’s financial troubles, even short-term reprieve from immediate crisis fears spells an immediate improvement in the pound’s outlook. That said, the currency didn’t take to the encouraging tack. Avoiding a Greek-led Euro identity crisis doesn’t translate into immediate recovery. In the meantime, we will follow up on the announcement of new stimulus last week with CPI data today.
Swiss Franc Doesn’t Budge from 1.2000 EURCHF Floor
Though it has proven the most resistant pair to change, the EURCHF should show euro progress if the fundamental situation behind the region’s financial situation genuinely improved. That was clearly not the case Monday as the pair held cemented to 1.2000. That is a statement unto itself as to how investors and those protecting funds see the weekend’s developments. It also signals to the SNB, there may be no natural rebound.
Japanese Yen Slide Uneven, Unconvincing
With the fundamental wave that was rising into this week, it came as little surprise that Japanese officials decided to leave its current policy bearings unchanged last Friday. The Greek election removes some of the need to take unnatural steps to curb the yen’s fundamental appeal. Now we will see if the G20 meet and Fed decision provide a little more progress on this front. That is unlikely, and hence the yen’s mixed performance Monday. In other news the BoJ’s monthly report complicates matters with an upgrade export and production assessment.
New Zealand Dollar Extends its Rally, Trade Data to Precede GDP
Though the kiwi dollar wouldn’t outpace its Australian counterpart this past trading session – difficult to do when a mere moderation of the RBA rate forecast feeds a sizable relief rally – the currency has topped performance amongst the majors over the past week. Over the past week, the kiwi is up 2.9 percent against the dollar, 2.5 percent versus the yen and 2.2 percent higher matched up with the Canadian, Swiss and British currencies. This performance no doubt owes much of its momentum to an improvement in underlying risk investor sentiment, but outpacing fellow high-yield counterparts requires an additional factor. The rate advantage on the 10-year government bond yield (3.39 percent – 39 bps higher than Australia’s) and forward rate forecast present a tangible advantage even in questionable ‘risk on’ market phases.
Gold Recovers Footing after Early Morning Tumble
Given the implications of this past weekend’s Greek vote, one would expect that the alternative to traditional currencies and government bonds – gold – would see exceptional volatility and potentially a jump start on a new trend. Volatility indeed reared its head on the session with a strong, $22 reversal from an early bearish drive. Then again, the subsequent tail didn’t even measure up to the turn from June 9. Equally unusual was the lack of volume behind this widest swing in four trading days. With the Fed rate decision ahead, hesitation in trading the primary alternative to currencies is to be expected. Though avoiding an immediate financial crisis in the Euro Zone should perhaps carry a little more influence…
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