Dollar Bounces Back, but Still Seems Fragile

The US dollar has come back better bid after initially extending yesterday's pullback.  The euro pushed to $1.1330 after having dipped briefly below $1.1200 yesterday.   However, despite what appears to be an approaching brink with Greece, a softer than expected German ZEW survey, and the two-day FOMC meeting that gets underway today, the euro remains fairly resilient. 

The ten-year German bund yield has been pushed below 80 bp for the first time in nearly two week.    However, the spreads are continuing to widen today.  One force behind the euro's resilience appears to be speculative participants giving up on the bearish euro view.  Specifically the gross short euro position in the futures market peaked in late March near 271k contracts.  As of June 9, it stood at 190.6k contracts, the smallest since last December. 

Another factor at work is the shift in expectations for Fed policy.  While the WSJ poll found nearly three-quarters of economists expect the Fed to raise rates in September; that hike is now seen to be the only move in 2015.  Recall that in March, the FOMC's dot plot pointed to two hikes this year.   

 The dollar rose above the previous day's high against the yen for the first time since June 5 today.  It rose to JPY123.80 in response to BOJ's Kuroda's attempt to clarify last week's remarks that drove the dollar from around JPY124.65 to JPY122.45.  Kuroda had observed that the yen's real effective exchange rate was unlikely to weaken further.  He has not changed this assessment.  Rather he said his intent was not to influence the dollar-yen rate and noted for good measure that a weaker yen helps promote exports. 

Some had tried linking Kuroda's comments to the vote granting Obama trade promotion authority.  However, by the time Kuroda's remarks, the "currency manipulation" bill was not part of the legislation in the House of Representatives.   Japanese officials are very concerned about the failure of the House of Representatives to move forward TPP.  

The White House is casting an optimistic spin, and warning that this is a procedural snag, like the one in the Senate that was quickly overcome.   We felt confident that the Senate snafu could be quickly fixed  but less sure about the House.   It looked like a new vote (do over) on the Trade Adjustment Assistance was going to be held today, but late yesterday, the Rules Committee extended the ability to reconsider TAA until July 30, the last day before the August recess. 

The European Court of Justice made it official.  The ECB's OMT program was well within its mandate.  Recall that apparently over the objections of Berlin, the Bundesbank argued before the ECJ that the ECB overstepped its authority.   Some attributed the euro's run up to the news.  However, this was very much what was expected. 

Separately, the German ZEW survey was softer than expected.  The assessment of the current situation fell to 62.9 from 65.7.  The consensus was for 63.  However, the expectations component was even more disappointing.  It fell from 41.9 to 31.5, which is the lowest reading since last November.  The consensus expected a pullback to 37.  Note that over the past month, the German Dax has fallen nearly 10%.  Indeed, it gapped lower today, dipping just below the 10800 level, a new four-month low.  The gap can be found between yesterday's low (10952) and today's high (10934).  We suspect this is a normal gap, which means it will likely be filled in the near-term.  

The UK reported May inflation.  CPI was in line with expectations, rising 0.2% on the month.  This was sufficient to lift the year-over-year rate from -0.1% to +0.1%.  There was some disappointment that the core rate rose to 0.9% from 0.8%.  The consensus had expected a 1.0% reading.  Sterling appeared to have been sold on the news, but it moved almost tick for tick with the euro, suggesting it may have been a function of the broader US dollar recovery.  In any event, sterling found a bid in front of $1.5540, after having seen $1.5630 a couple of hours before the CPI. 

Another development to note was the RBA minutes.  There was not much fresh guidance, and the market took the Australian dollar up initially.  It rose a few ticks above yesterday's high before running out of steam. As it approached $0.7720, new buyers emerged. 

Meanwhile the Greek saga continues to play out.  The reports that Greece may be forced to institute capital controls seems partially a scare tactic which serves to exacerbate the capital flight from Greek banks.  It seems part of the campaign to exert as much pressure on Greece as possible.  If Greece is playing a brinkmanship game, what are the official creditors playing?  Brinkmanship, after all, is like the tango--it takes two. 

There is some faint hope that the Eurogroup of finance ministers meeting later this week could produce a breakthrough.  However, the lack of trust, if not outright animosity is likely to prevent a deal.  There is some suggestion that the European heads of state, which are to meet next week, could have an emergency meeting this weekend.    Recall that there is not a mechanism to evict Greece from the monetary union.  Officials, primarily through the ECB could squeeze Greece hard enough to make it more tempting, even though the latest polls show some 80% of Greek voters want to stay in EMU. 

The ECB could refuse to raise the ELA ceiling and claim that Greek banks are no longer solvent.  Their solvency was a function of the government's guaranteeing certain collateral.  The ECB could argue that the government's guarantee has lost much of its validity.  Capital controls could indeed be introduced, but as the Cypriot precedent shows, capital controls in themselves do not push a country out of EMU. 

The North American session features US housing starts and permits.  Recall that in April starts surged by 20.2%.  Some payback should not be surprising.  The Bloomberg consensus calls for a 4% decline.  Permits jumped 10.1% in April and are forecast to slip 3.5%.  With a pullback consistent with the consensus, starts would still be running above the Q1 average.  

disclaimer