Dollar Gains Momentum as Greece Talks Begin

The dollar is higher against all major and EM currencies today.  Greece remains in the spotlight, Australia is due to report June jobs and the market awaits news on a potential deal with Iran.

  • EU Finance Ministers meeting on Greece will start shortly, followed by an EU summit later today; comments so far have been enough to keep hopes for a deal well alive.
  • The Reserve Bank of Australia kept rates steady at 2%, as expected, but Governor Stevens continued to talk down the Aussie
  • The already extended self-imposed deadline to reach a deal with Iran will likely expire today, but an agreement seems close at hand
  • The plunge in commodity prices is hurting the usual suspects in the commodity currencies nexus

Price action:  The dollar is broadly higher against major and EM currencies.  The yen is the major exception, trading flat around 122.50.  The euro tested the $1.0955 late-June low, but has been unable to break below, now trading around $1.0965.  The pound is trading below $1.5500 for the first time in three weeks, now trading around $1.5460.  The Australian dollar is making new multi-year lows just above $0.7400 following comments by RBA Governor Stevens and the slump in commodity prices.  The Norwegian krone is the worst performer in the majors, with the dollar rising above 8.21 and not far from the March high near 8.4190.  EM currencies are trading with a weaker tone, but the moves have been a bit more subdued than the majors.  RUB and ZAR are underperforming. The Shanghai Composite closed -1.3%, a relatively small move, but enough to raise questions about the effectiveness of the recent support measures.  More worrisome was the 5.3% drop in the Shenzen Composite.  The Nikkei ended the day 1.3% higher.  MSCI EM is down 1%, the fifth straight down day and 8 of the past 9.  European indices are little changed, while S&P futures are pointing to a higher open.  Global sovereign debt yields are mostly lower, falling nearly 10 bp in the back end of the German curve.  UK 10-year gilt yields are down 10 bp too, despite a mixed IP reading.  Oil prices are rebounding around 1.5%, but remain vulnerable to further downside moves.

EU Finance Ministers meeting on Greece will start shortly, followed by an EU summit later today.  We don’t think anyone is expecting a quick resolution.  Indeed, official comments from both sides after the “No” vote suggests the gap between the two remains wide.  As we will discuss more in depth in a forthcoming report later today, we see the weekend referendum in Greece as the end of the “extend-and-pretend strategy.”  The EU now has to decide what form Greece’s debt reduction will take:  default or debt relief.

Comments so far have been enough to keep hopes for a deal well alive.  For example, ECB member Nowotny mentioned the possibility that the ECB could allow bridge financing under certain conditions, but didn’t sound too hopeful that any sort of deal will happen.  Meanwhile, EU’s Junker said they are willing to do what it takes to get a deal.  This will be a noisy period and its best to look through the cacophony of official comments that are sure to come, until something more concrete emerges.

The ECB kept Greece’s ELA ceiling unchanged Monday.  However, it also adjusted the haircut on collateral used by Greek banks, which forces those banks to post additional collateral to make up for the newly created shortfall.  So even though the ELA ceiling was kept unchanged, it would seem that the additional collateral requirements will squeeze Greek banks even more.  Time is running out for Greece, and they need to strike a deal quickly.

European data has taken a back seat to Greece today, but are worth mentioning.  German IP was slightly softer than expected, flat m/m in May with the April gain revised down to 0.6% (was 0.9%).  UK IP was stronger than expected, rising 0.4% m/m vs. consensus -0.2%.  However, UK manufacturing production was soft, -0.6% m/m vs. consensus 0.1% gain.  Norway IP rose 0.7%, but comes after a -5% drop in April.

The Reserve Bank of Australia kept rates steady at 2%, as expected, but Governor Stevens continued to talk down the Aussie.  While the governor conceded the decline against the dollar, he noted that it has declined less so against a basket of currencies.  Therefore, “further depreciation seems both likely and necessary.”  All in all, the comments seem in line with markets pricing a high probability of another rate cut in the coming months.  Yields on Australian bond and interest rate futures were lower on the day, but in line with moves seen in global rates markets.

Later this week, Australia reports June jobs.  Consensus is for a flat reading after +42k in May, but the breakdown will be important.  In May, we saw as 14.7k rise in full-time jobs and a 27.3k rise in part-time jobs.  Iron ore is sinking fast, on track to test the April cycle low near 47.08.  While the correlation between iron ore and AUD is not very strong, the risk off sentiment coupled with lower ore prices and rising China concerns have all conspired to push the Aussie below .7500, for the first time since 2009.  We think the downside will continue to be probed.

The already extended self-imposed deadline to reach a deal with Iran will likely expire today, but an agreement seems close at hand.  Talks in Vienna have been ongoing for 10 days, and positive headlines are weighing on oil prices.  Crude futures are marginally higher today, but this follows a 7% drop in WTI and 6% in Brent yesterday.  Charts and fundamentals suggest further downside ahead for oil.  Fundamental pressure comes from downside global growth risk from China and EU, steady supply from OPEC, and last week marked the first increase in US drilling activity in 8 months.

Technically, Brent is leading this move and has already broken the 62% retracement objective from its March-May bounce, which sets up a test of the March low near 52.50.  WTI is getting dragged lower, testing the 50% retracement objective from its March-May bounce near 52.30.  The 62% objective comes in near 49.88, and a break below that would set up a test of the March low near 42.00.  And we note that it’s not just oil.  Iron ore prices fell over 5% Monday, while copper shed nearly 4%.

The plunge in commodity prices is hurting the usual suspects in the commodity currencies nexus.  On the EM side, these include RUB, CLP, COP, MXN, and MYR.  RUB has been weakening since mid-June but the pace has accelerated in the last few sessions.  MXN is trading near all-time lows, MYR is making cycle lows, and both CLP and COP are very close to making new cycle lows.

During the North American session, the US reports the May trade balance, which could impact the Q2 GDP forecast.  We may also get more insight into the labor market with the JOLTS reading for May today.  However, the market will likely be more sensitive to the FOMC minutes on Wednesday and Yellen’s speech on the US economic outlook at the end of the week.  The Chair’s speech will likely touch on the key points she is expected to provide in her testimony the following week before Congress.