Greece and the troika appear to be moving further away from compromise in the last few days, even as the government’s need to access the €7.2bn bailout funds increases. Capital flight has been on the increase in Greece since the elections, and funds are being drained from the banking system by a variety of means, new car purchases are one imaginative form of safe haven, as are inflows into mutual funds operated out of safer countries within the Eurozone. Unfortunately this is a vicious circle, because the more liquidity is drained from the Greek banking system the greater the likelihood that Cyprus style capital controls will have to be imposed sooner or later. But.. you wouldn’t know it by watching the performance of EUR/USD over the last week, the currency pair is almost 2% stronger than it was at the end of last week (euro appreciation relative to the dollar). But as I’ve noted in recent days, this seems more about the US dollar than anything. As things stand, we continue to maintain our positive stance on the greenback, and only moves above 1.1470 in EUR/USD and 1.5820 in GBP/USD would change that. In any case, the ability of the market to shrug off concerns about Greece is a sign of how fully discounted information on the crisis has become, and presumably only really new news will change that.
Some potentially huge data out later on today… retail sales data will published for the United States later on in the European afternoon. When you consider that the FOMC is next week on 17th June, anything that puts the condition of the North American economy in a positive light could influence the decision making process. Of course no one knows just how close policymakers are to pulling the trigger on policy normalisation but you would have to think that tightening labour markets, wage growth, any signs of a more confident consumer could easily tip the balance. Of course our primary concerns are always related to currencies, and a strong retail sales number is likely to halt the greenbacks mini slide, in fact it could throw it into sharp reverse. As I observed earlier, the motive force in the EUR/USD pair definitely seems to be the USD side right now.
Across the world, South Korea has cut interest rates in an attempt to bolster confidence, given the outbreak of MERS (Middle East Respiratory Syndrome), a close cousin of SARS. Given the impact Ebola had on the global economy this situation warrants careful monitoring, and bear in mind that the South Korean economy is a significant contributor to global growth and is a key part of the North Asian economic hub. The RBNZ also cut interest rates in New Zealand for the first time in four years, given low inflation and an overvalued currency.
The major bond market selloff in the last few weeks has put several emerging markets currencies under pressure, you only have to look at where the South African rand has traded to in recent days (you have to go back over 10 years to find a time it has traded as weakly as this). This could be a mere shadow of what might come when the Federal Reserve moves. If you have significant exposure in less liquid currencies this should be at the forefront of your considerations in the months ahead. We will of course keep you informed about Federal Reserve policy maker speeches and actions.
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