Good morning

The USD has had a torrid time over the past week (since the FOMC statement) falling from 1.0650 to 1.1043 and then back to 1.0650 the day after the FED meeting only to fall again towards 1.1000 on the back of a potential deal between Greece and her creditors. While there is no deal signed as yet, the mere fact that efforts are being made to reach a deal have given the EUR a boost. ECB President Draghi spoke to the European Parliament Committee in Brussels yesterday saying that the ECB will reinstate the Greek waiver if the review is successful. We still keep in mind that Greece should service €2 billion debt on Friday (besides paying salaries to government workers and pensions) and can do it only by rolling over its treasury bills as the ECB stopped funding the Greek banks in February. This gives the Greek banks the choice between participating to fundraising to save Greece, or to let it default. The second scenario will severely harm the EU/EUR and send Greece back to an era not worth thinking. We have always said that the negotiations will be fraught with difficulties but a resolution will ultimately be found. The Greeks are simply doing what they have to and the EU is saying we need to toe the line and treat you just like we do the other member states. Even Spain got into the act yesterday saying Greece will not be given more money until they adhere to the reforms and fall in line with the rest of the EU. No doubt there will be a great deal more to write before we see a resolution agreed.

To aid the EUR, German manufacturing PMI came out better than expected at 52.40 from 51.1, while the EUR manufacturing PMI also came out stronger at 51.9 from 51.00 and services PMI 54.3 from 53.7. No doubt these numbers will give Pres. Draghi a smile by confirming the ECB’s QE is going some way to lift the economies of the EU. On the flip side, Chinese manufacturing PMI dropped to an 11 year low of 49.20 from 50.70 in February. No doubt and as we have noted previously, these are “worrying” times for the PBoC. They are throwing the kitchen sink at getting the economy to grow. They are very likely to drop the interest rate currently at 5.35% having lowered the repo rate by 0.10% to 3.55%.

The lower USD has led to a resurgence in EM currencies with the ZAR (sub 12), ILS (sub 4.00), RUB (sub 60) to name but a few all rallying on the back of this. Do not be confused with a rally as a result of changes locally. The EM rally is on the back of a fall in the USD one which is healthy and which Pres. Yellen would be glad to see. In her conference last week, she mentioned the strong USD so the recent turnaround is not surprising. Our view has NOT changed and PARITY EURUSD 1.00/1.00 is still very much on the cards and anticipated to happen over the coming months. FX options traders have started buying SUB PARITY strikes for Q3-Q4 in anticipation of this move. It is always a good indicator to see what the Options desks are doing as it gives one a better idea of what we are likely to see over the coming months.

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