At the eleventh hour it appears that Greek officials and creditors are close to a deal, but the outcome is still an unknown. On a personal level I find it hard to believe there won’t be an agreement of some sort in the next few days. Let’s not forget that Greece needs to repay some €1.5bn by the end of this month, and as you know… time is running out. Yesterday the market’s reaction to increasing hopes of a positive outcome resulted in a considerably weaker euro against a basket of currencies, even as European stocks continued this week’s impressive rally. No one should be surprised, this has been the paradigm – European stocks higher, euro weaker – for the last few weeks.
In deference to the never ending nature of financial markets, it behoves us to consider what is likely to happen if and when the crisis is indeed resolved. As an aside, a resolution by no means implies a happy outcome for any or all parties, it is merely a compromise that enables Greece to continue to function within the auspices of the Eurozone structure. Chancellor Merkel and other Eurozone leaders have already been shown in the most blatant manner that the stakes are of the highest geopolitical order, with Tsipras’ flirtations with Vladimir Putin. Say what you will about Tsipras and his relative lack of experience of big time politics, he has played the geopolitical card as well as he could, one might question his decisions at the national level, but he clearly has a grasp of the deepest fears of Eurozone leaders.
But there’s more going on in the world than the Greek crisis. There’s not really much new information to report regarding the United States, the decisions the Federal Reserve will have to confront in the next month or two have been well flagged. However we did get some strong home sales data on Monday in the U.S, and I mentioned the strong PMI data out of France and Germany yesterday. But we also saw rather disappointing industrial production numbers in Italy, albeit with new orders surprising on the positive side, but we also got strong Italian retail sales data yesterday as well. Net net one could describe the Italian data as a marginal positive, and the Eurozone aggregate PMI data was good, which is no surprise given the two largest components – France and Germany – were positive contributors. And so when I add that durable goods orders in the United States were good, we start to get a macro picture that’s certainly better than the rather gloomy Q1 data. Don’t pop out the champers yet though, the US PMI yesterday was not as good as forecast, and a decline on the previous month’s data to boot. It would be best to summarise the data as mixed but not confirming what appeared to be a slowing global picture from all the Q1 data. Almost the goldilocks scenario of not too hot but not too cold.
This morning we’ve seen French GDP published exactly in line with expectations, German business expectations slightly less optimistic than forecast and a continuing picture of deterioration from Scandinavia. Something we’ve not really talked about in recent weeks was the seeming equity bubble in China over the last few months. All of the good cheer has disappeared in recent days with a rather sharp decline, but for now I’m not too concerned as key support levels appear to have held. Given the State sponsorship of the equity rally (or at least encouragement) a bursting bubble in China could well have global implications, but for now that is not the case. We will continue to monitor the situation. We live in a world where global risk sentiment can be impacted by any number of sources so vigilance remains the name of the game.
So… what now for currencies? We continue to maintain that a continuation of US dollar strength is likely, perhaps even inevitable given the longer term macro dynamic in play. We look for the pound sterling to continue to strengthen relative to the euro for similar reasons, the monetary cycle in the Eurozone is lagging those of the UK and U.S. Given past big dollar moves, the corrective nature of currency markets since mid-March remains fairly brief in the context of some of the longer term moves we’ve seen in the last 30 years. This means that the jury is out for when we start to see impulsive dollar strengthening again. It is entirely within the realms of probability that we could see 1.60 before sub 1.50 in GBP/USD, and 1.18 before 1.05 in EUR/USD. As always we will continue to monitor key levels and try to interpret the implications of global events in the context of currency markets.
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