Still on Track for a EU / IMF Sponsored Bailout of Greece

July 24 2011 by Spencer McKay in Forex Release |No Comments

USD gained marginally but not materially during the Asian session as optimism generated by last week’s news flows around Greece dissipated. However as Europe entered the market, FX risk-correlated trades had begun to rally and the lack of real EU negative news was deemed a good sign. USDCHF climbed to 0.8387 before dropping to 0.8329 while EURUSD fell to 1.4560 before rallying to 1.4666. As we stated yesterday, the risk appetite we are seeing in FX has not migrated to other asset classes and we don’t expect that it will. US equity markets took a dive yesterday and Asia followed this morning as concerns over the direction of the US economy and global growth continue to be debated.

In Australia, the RBA held the cash rate unchanged at 4.75% as was generally expected, however with around a 20% chance of a hike being priced into the news caused the AUDUSD to react negatively. The statement was broadly unchanged and not overly hawkish but the key phrase that “the current mildly restrictive stance of monetary policy remained appropriate” replaced the more hawkish “higher interest rates were likely to be required at some point.” From Japan, Finance Minister Noda finally reacted publicly to the JPY’s recent appreciation – “I think the market was affected by perceptions toward the U.S. economy, but in any case, I will closely watch developments in the market”. This is just another case of failed / costly intervention on the part of the Japanese. In the near-to-mid term, we don’t expect anything from the MoF or BoJ.

Yesterday, we had the usual headline grabbing with EU / Greek comments which for the moment seemed EURO negative. However, to cut through the volatility we just wanted to outline some of our views. We suspect this phase of the EU Sovereign crisis is coming to an end with the EU / IMF / ECB is going to cough up the bailout cash rather than opting for an event triggering “reprofiling” or default. Even the slightest hint of “voluntary debt exchange” had Fitch commenting that they would consider this a default event. Greece will get the cash and with it fears of a tail-like event in Europe will dissipate….for now. In addition, focus will turn back to EU inflation and the prospect that Trichet will “signal” a hike in July on Thursday. The recent appreciation in EUR is testament that the market is unwinding some of the fear driven, safe-haven flows (see IMM data for new building of long EUR positions). The combination of dissipating concerns over Greece and expectation of higher interest rates should give the EUR a boost in the near term.

On the other hand, the US has skidded into a soft patch in economic data. Friday’s payroll data was dreadful and with unemployment rising to 9.1%, it’s unlikely the US consumer will come the nation’s economic rescue. What further complicates the situation is:

1. The FOMC doesn’t have any tools left to use other than QE3 (QE1 & 2 haven’t been that effective) 2. With the weakness on jobs, the social and political environment will get extremely charged with decisions being made on short term and non-rational bases. There is a very good chance the US could dip back into recessionary territory in 2012. Not only are upcoming decisions going to affect growth next year, but the impending technical default should Congress fail to increase the debt ceiling is looming larger. Compared to the storm clouds circling the US , Europe doesn’t look so bad. One thing we do like is short USD positions for the ECB vs. FOMC rate diverge.

We suspect that both safe-haven trades and Gold look very crowded right now. With the US 10yr being compressed below 3.00%, there just doesn’t seem like much more room to go down. On the other hand, if the US delays debt repayments and the market’s confidence weakens, the sell off could be huge.

Gold is more tricky – it’s as much of a safe haven as it is a commodity play. If US growth dips and Chinese monetary policy tightens (another hike expected this week) –this will halt demand and set off a complex commodity drop as everything is strung together by ETFs. Watch for equity markets to be stuck in their ranges for the summer.

If you’re looking for safety, CHF is the darling of safe haven trades. That said, today’s Swiss May CPI of +0.0% m/m vs. -0.1% expected and +0.1% prior; 0.4% y/y is killing it. The SNB’s Jordon stated that interest rates “can stay low relatively long if the situation is such that inflationary risks are low” and given today’s flat lined CPI print, rates are not going anywhere.

Today’s CPI figure showed that inflation is now hovering precariously over deflationary levels – this all but eliminates any rate hike before December (definitely not on June 16th). If the fear of deflation wasn’t enough to end speculation on the SNB shifting from its semi-zero interest rate policy, the strong CHF and recent cracks in Switzerland’s robust economic data should be enough to sideline any hawks. Even worries about an overheating real estate market won’t propel policy members into the action. While growing imbalances within the economy surely will generate concern, an interest rate kicker on top of the darling safe haven trade, will only exacerbate the problem, as the CHF will attract yield starved investors even more.

SNB members will breathe a sigh of relief that inflation did follow expectations and slipped into deflationary territory but this might prove temporary. Should the growth trend continue to ease, the pressure on prices will also follow. But unfortunately for the SNB, they don’t have a lot of options should inflation head south as policy easing and physical intervention (in our mind) is off the table. However, we are expecting a temporary solution to the current phase of the EU sovereign crisis, which should lead safe-haven flows to reverse and EURCHF to head higher.

As for today, iimportant news releases will be EU retail sales, Germany Factory Orders, US economic optimism figures, US consumer credit and the Fed’s Bernanke speech.

07:00 NOK Unemployment Rate (May) 2.60% prior
07:15 CHF CPI (May)
09:00 EUR Euro-Zone Retail Sales (Apr
10:00 EUR GE Factory Orders nsa (Apr) 9.00% prior
16:30 USD Fed’s Lockhart Speaks
19:00 USD Consumer Credit (Apr) USD
19:45 USD Fed’s Bernanke Speaks

The Risk Today: EurUsd EURUSD’s 2-week uptrend channel continues to dictate proceedings, and pullbacks thus far have been relatively shallow. Yesterday, the pair could only dip as far as 1.4557 before eager buyers stepped back in to drive us up towards the 1.4661 highs once more. Resistance levels up here are relatively sparse; the next points of note above 1.4661 are the upper edge of the current uptrend at 1.4750-60, 1.4899 (5 May high), 1.4940 (4 May high), and the hugely significant 1.5000 psychological barrier. Continuing the recent pattern, we expect dips to be shallow, supports below are seen at 1.4557 (yesterday’s low), 1.4525-35 (lower edge of uptrend channel), 1.4453 (3 Jun low), and 1.4309 (1 Jun low).

GbpUsd GBPUSD remains in a shallow downtrend channel for the time being, but we are firmly of the belief that this correction will be short-lived and that a resumption of the recent rally will ensue this week. In order to kick start our bullish scenario, we really need to see a break out from this downtrend channel, which currently comes in around 1.6420-30. Once we resume the upward trend, pockets of supply are anticipated around 1.6461 (yesterday’s high), 1.6498 (1 Jun high), and 1.6574 (4 May high); a break above which would open the path for a test of 1.6746 (28 Apr high). Nearest supports now stand at 1.6325 (today’s low), 1.6274 (26 May low), 1.6231 (100-day moving average), 1.6133 (25 May low) and then the critical 1.6060 support (24 May low).

UsdJpy USDJPY is trading sluggishly today, having hit a new low on this downtrend of 79.99 yesterday. It’s not the most exciting pair to be watching at present, as the entirety of the pair’s range in the last 24-hours spans no more than 35 pips; nevertheless, with a broad downtrend channel in play, our bias remains bearish. The next downside levels are seen at 79.57 (5 May low), 78.26 and (17 Mar low), before the all-time low 76.40. Meanwhile resistance on the topside is plentiful; starting with 80.40 (yesterday’s high), 81.01 (3 Jun high), 81.33 (2 Jun high), 81.78 (31 May high), 82.79 (27 Apr high), 83.27 (18 Apr high), and 83.79 (15 Apr high).

UsdChf The outlook for USDCHF remains extremely bearish, with the pair locked in a downtrend and an ongoing bearish flag pattern in progress. As a reminder, we went short on the activation of the flag around 84.15 and are aiming for a target of 0.8260 (estimated as the length of the flag pole applied to the point of break out). Really the only things we are relying on for support below are the all-time low set yesterday at 0.8328, then purely psychological supports like 0.8300, 0.8200 etc. Levels on the topside stand at 0.8386 (yesterday’s high), 0.8453 (2 Jun high), 0.8547 (31 May high), and 0.8595 (rebound highs seen 27 May).

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