The USD roller coaster ride continues. Despite all the bad press over the past weekend that Greece had missed/ignored the €300 repayment due to the IMF on Friday, the EUR (USD) appears to have found a second wind. The move higher in the EUR yesterday was the result of strong German data with exports up 1.90%, imports down 1.3% and Industrial Production up 0.90%. While these numbers are indeed impressive, the US employment numbers on Friday were equally impressive growing at +280k. As we have noted previously until we have a more definitive idea of when US rates are going to rise (Sept is the call), the currency is likely to remain range bound 1.09/1.1350 as the market attempts to build medium term positions. If one looks at the FX Options market for direction you can see that Option traders are still VERY concerned and have thus maintained EURUSD vol at the recent highs. 1m vol stands at 13.60/13.75, 3m 11.70/12.00 and 1y 10.45/10.65 – in contrast GBPUSD 1m stands at 8.65/9.15, 3m at 8.25/8.65 and 1y at 8.30/8.65. I think under the circumstances I should add USDJPY given that the JPY has fallen to a 12 year low, with 1m vol at 8.80/9.00, 3m at 8.60/9.00 and 1y at 9.65/9.80. What I am trying to illustrate is the GBP is sitting above the crucial psychological 1.50 barrier as is the EURUSD 1.100 while the JPY is trading above 124 and yet the JPY and GBP vol remain “depressed”. On the flip side EURUSD vol is trading at a 5% premium over the others which just goes to show how the market is preparing to position themselves for (1) GREXIT and (2) the USD rally post rate hikes. No doubt the inability to strike an agreement over Greece has been the main catalyst driving EURUSD vol higher and until such time we have a definitive result you can expect vols to remain bid.

The Greece saga will simply not go away. In a way it is helping the markets remain volatile which is what all FX traders like. Having said that the reports over the weekend continue to keep traders on the defensive as some members of Syriza are now openly calling for a default and GREXIT. The majority (80%) of Greeks want to stay in the EU so the GREXIT members are in the minority. It really does defy logic given the complexities and financial Armageddon that ensues a GREXIT. Meanwhile, the economic situation continues to deteriorate in Greece, adding pressure on the general government budget. According to the numbers released by the Ministry of Finance last Friday, the state revenue shortfall grew €1bn in May to reach a total of €2bn since the beginning of the year, and forced the government to increase arrears of payment. Without fresh money from its creditors shortly, Greece may be unable to pay €1.6bn to the IMF at the end of June. With the increasing pressure to GREXIT the Greek banks have continued to see a run on their cash adding more pressure to an already unstable situation. The banks are increasingly relying on Emergency Liquidity Assistance from the Bank of Greece. However if the IMF stop the funding of the ELA this could see the Bank of Greece imposing restrictions on the capital that people can withdraw. With circa €1.6bn due at the end of June and €3.4bn due on the 20 July the Greeks are (secretly) hoping for a deal so that the remaining IMF’s €6.5bn in funding can be released. The strong rhetoric from the PM over the weekend does not help matters. Perhaps the Greek people should realise before it is too late that their choice of Syriza was in hindsight a bad vote.

Call me a conspiracy theorist, but on the face of it after such strong words from Tsipras over the weekend you would have expected the EUR to get mauled at the open. Yet the opposite happened and the German data numbers were “blamed” for the rise in the EUR. My point is I wonder HAS A DEAL BEEN STRUCK!!! Tsipras openly attacks Troika misses a repayment and the EUR APPRECIATES. I smell something brewing in the kitchen and I wonder if that is the smell of a successful resolution (for now) in this long running Greek saga.
As for the GBP – My gut still tells we are heading back down to 1.50 over the coming weeks. Let’s see how right my gut turns out to be.

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US employment data, in the form of the non-farm payrolls report, came out on Friday and it was generally impressive. But acting as devil’s advocate I would like to direct you to the chart below…

This chart illustrates one reason why some Federal Reserve policy makers continue to resist calls for higher US rates sooner rather than later. Now, granted this is an old chart, you can see that the participation rate (the percentage of the US working age population in gainful employment) is somewhere below 63% in early 2014. Well… it’s now the middle of 2015 and the participation rate published on Friday was 62.9%. So… no change in labor force participation over the last year then! For me, the fact that this chart has been in decline since well before the great financial crisis in 2008 speaks of more than cyclical concerns, I can’t pretend to be an expert on demographics, but there is a rational explanation for this, and there are certainly rational justifications for why interest rates in the United States are too low now that counter this statistic anyway.

In any case.. back to last Friday. 280,000 new entrants to non-farm payrolls, comfortably in excess of the 225,000 forecast, and perhaps more importantly average hourly earnings beat expectations as well. As I’ve mentioned this before, wage growth is likely to be the trigger for policy normalisation, and it’s starting to grow. Surprisingly however, the unemployment rate rose. This might be counterintuitive, but that is likely to be a positive, implying that more people are starting to look for work. The US dollar’s reaction was immediate and unequivocally positive, rallying close to 100pips within minutes against the major currencies. The big moves in the last few days have been in favour of the dollar, and we continue to look for the greenback to strengthen into the end of the year. EUR/USD parity is still a possibility, as is 1.40 in GBP/USD, but the path towards that will be fraught with bumps and potholes. We consider it our job, to keep our eyes out on your behalf, to look through the fog and warn you of what’s coming, we aim to do that.

On the other side of the world, there are encouraging signs that Asia is doing rather better than thought. Japanese Q1 GDP data has now been revised up to 3.9% annualised versus the 2.4% initially calculated. Business investment has been much stronger than expected, with activity recovering it’s groove after the hit from the sales tax increase. Additionally data out of Singapore and South Korea has been positive relative to expectations. No one is saying that this is where the next great growth drive is coming from, but this is a sight better than fears that Asia could even be a bit of a drag. In fact according to some recent ‘nowcast’ factor models from Fulcrum, China and Japan are both recording stronger growth than seen in some time, and even the Eurozone (as we’ve been pointing out) has been looking spritely, particularly the serial laggards of Italy and France. The world is not the place of doom and gloom it has often threatened to be. Which is why I find the intervention of the IMF last week a trifle puzzling (remember that they cautioned the United States against hiking too soon). But who can understand why some of these supra-national bodies do and say what they do sometimes. Perhaps it’s more about staying relevant.

What is clear, is that continuing gradual improvements in the United States economy will increase the pressure on policy makers to hike interest rates. As in all things market related, it’s the anticipation that matters, and the longer this goes on, the greater the attraction to the US dollar. We continue to strongly believe to be the case that over time the US dollar will strengthen against its major partners..

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Opinions expressed are subject to change without notice and may differ or be contrary to the opinions or recommendations of ParityFX. Unless stated specifically otherwise, this is not a recommendation, offer or solicitation to buy or sell and any prices or quotations contained herein are indicative only. To the extent permitted by law, ParityFX does not accept any liability arising from the use of this communication.

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