There is no trade call today as we continue to monitor European talks regarding Greece. Watch through my video covering this week’s risk events if you wish to recap the situation there.
The USD remains the strongest currency in the longer term. The market is expecting the Fed to raise rates around September. Recent NFP readings have been positive and core inflation has, overall, been trending higher. Although we expect bullish sentiment on the dollar to remain in the near term, it is near its long-term highs against many counterparts and therefore may be susceptible to pullbacks. Such pullbacks will likely provide buying opportunities. The recent FOMC statement showed the Fed are on track to raise rates in the context of an improving economy, however USD saw heavy selling as the economic projections for the FFR in 2016 and 2017 were scaled back. If the market or the Fed see a deterioration of the Greece situation as a threat to global financial stability, then we may see rate hike expectations pushed back.
EUR: The referendum on July 5 rejected the creditors’ proposal and has created a substantially uncertain situation in Greece and the rest of Europe. The market will be watching any developments closely to gauge whether a resolution is possible, or if an exit from EMU by Greece is more likely. Already a fundamentally weak currency due to extremely loose monetary policy, we now expect its depreciation to accelerate over the medium term. We expect, and have seen, huge volatility in the currency and this will continue until some resolution is found for Greece.
GBP is looking at a rate hike around the middle of 2016 and is therefore a fundamentally bullish currency in the long term. The latest jobs numbers showed much better than expected average earnings figures and this is very bullish for the pound as it brings forward the timing for rate liftoff. We are also aware of two of the nine MPC members being very close to voting for a rate increase. GBP has had a strong rally over the past several weeks and is currently near long term highs against most counterparts. Barclays forecast the BOE to hike rates in Q1.
AUD: Low commodity prices and a slowdown in China has put bearish pressure on the AUD. Overall the bias for AUD is on the bearish side, until we see more data. Language from Governor Stephens recently has been dovish. A resumption of the downtrend in base metals will also see AUD pressured. AUDUSD is currently at 6-year lows after poor retail sales on Friday.
NZD has a new official cash rate of 3.25% after the RBNZ cut rates on June 11. The Bank has left the door open for further easing and as such the Kiwi dollar is a bearish currency in the medium term. The recent GDP reading showed a huge miss and this adds weight to the chance of another rate cut, with some banks calling for two more cuts in 2015. Kiwi is at multi-year lows. Credit Suisse’s OIS market is pricing an 92% chance of a cut at the July 23rd meeting.
CAD remains on the weaker side of neutral. In the absence of unexpected data, CAD will take most of its direction from any significant changes in the price of West Texas Intermediate crude oil. When there is no oil-related news, the oil price will generally move with negative correlation to the USD. Recent GDP readings have opened speculation of a rate cut by the BOC as early as this month.
JPY remains bearish due to QQE. Yen weakness has accelerated recently on the back of USD strength. Yen is at a 12-year low against the dollar. Sentiment on the JPY can turn bullish quickly if there is severe uncertainty in the markets. Language from the BOJ shows they believe a recovery is beginning and QQE is having its intended effect. Recent positive GDP readings have dampened speculation of any additional easing. The Greek crisis is likely to see yen appreciate.
CHF is fundamentally a weaker currency given the SNB’s negative interest rates. It is highly susceptible to volatility due to SNB potentially intervening to weaken the currency as it tends to strengthen on safe-haven demand. CHF often will take direction from the EUR with which its correlation over the last 50 trading days is approximately 75%.
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