Dollar Comes Back Bid

The US dollar is extending its recent gains against most major currencies today.  The euro is lower for the third session after last week's attempt above $1.1400 was rebuffed.   While today's euro losses began in Asia, Europe has taken it down further.  The single currency is approaching the 20-day moving (~$1.1206), which it has not traded through since June 8.  

Many observers are scratching their heads.  The downside risks emanating from Greece have eased.  The ECB has again lifted the ELA ceiling to help offset run on deposits that were partially spurred by worries, fanned by official comments and an eager media, of imminent capital controls, bank holidays, and the much threatened Greek exit.  It is the third increase in as many days, as the ECB continues to drip-feed its approval.  Greek stocks and bonds are rallying, and more broadly, European stocks and bonds have rallied.

We note that the relationship between German bunds and the euro appears to have loosened in recent days.  Today the 10-year bund yield is off a little more than a single basis point and does not explain the euro's decline.  We cautioned that the large jump in gross long euro positions in the futures market last week (50%+) were likely in weak hands.  The euro averaged $1.1275 during the futures reporting period.  This is the middle of the $1.10-$1.15 trading range that has dominated activity since the March lows were recorded.  Establishing positions in the middle of the range leaves participants vulnerable.    We noted that in the options market, it appeared that participants were buying downside protection.  This seemed to be a more bearish tell than the price action in the spot market. 

The euro's losses are not only in the face of the somewhat less angst over Greece, but also is being registered despite the better than expected flash eurozone PMI.  The composite PMI rose to 54.1, a new cyclical high.  Both Germany and France best expectations.  Germany manufacturing PMI rose to 51.9 from 51.1.  The service PMI rose to 54.2 from 53.0.  France's news was even more pleasing.  The manufacturing PMI rose to 50.5 from 49.4.  It is the first reading above the 50 boom/bust level since April 2014.  The service PMI rose to 54.1 from 52.8, 

European officials have given Greece 48 hours to reach an agreement.  Over the last several months there have been so many deadlines and last offers, but given the pending payment due to the IMF and next month's chunkier ECB payments, and the fact the run on Greek deposits and concerns that the Greek banks are running out of acceptable collateral warns that the end game is at hand. 

Even at this late date, many observers continue to blame Greece and the "radical" Syriza government for threatening eurozone (and especially German) taxpayers.  How can this be?  Athens did not borrow a single euro from European taxpayers.  Berlin and Paris put their taxpayers money on the line when they agreed to lend Greece money so it could service its private sector creditors.  This was a politically expedient way to support European banks.  It is as if now that the horses have bolted, that they want to double lock the barn door.  

Meanwhile, the higher US yields and stronger Japanese stocks have lifted the dollar to four-day highs against the yen.  It has stalled in Europe near JPY123.80, which corresponds to the 20-day moving average.  It also corresponds with the (61.8%) retracement of the slide from last week's high.  Support is now pegged near JPY123.40.  The JPY124.45 area is the next upside target.  

The Nikkei closed the last two sessions of last week below the 8-month uptrend.  This was seized upon as a new buying opportunity.  The BOJ continues to buy Japanese shares, as do Japanese pension funds.  One of the ways Japanese companies are embracing shareholder value is by initiating their own share buyback programs.  Since last Thursday's low, the Nikkei has rallied more than 4%.  It gapped higher at the opening and closed on it s highs, which represents a new 15-year high. 

Chinese stocks plummeted last week.  The markets were closed yesterday for a public holiday.  The markets opened lower, and the uptick in the HSBC flash manufacturing PMI did not prevent follow-through selling.  However, the market appeared to turn around with the help of state-owned financial papers doing a bit of cheer-leading and "reminding" investors of the drivers of the bull market.  Both the Shanghai and Shenzhen Composites closed higher on the day (2.2% and 1.2% respectively). 

What we find especially interesting is that foreign investors, which have been reducing exposure to Chinese stocks via open ended mutual funds and ETFs, appear to have taken advantage of the hasty retreat to get back involved.  This is evident by the share of the Hong Kong-Shanghai Connect that was used.  After relatively light usage in recent weeks, it jumped to 61% before the weekend and was estimated at 55% today. 

Although existing US homes sales are not the stuff that drive the dollar, we think yesterday's report was more important than appreciated by market participants.  There were three  aspects of the report that caught our eye.  Excluding November 2009 when a tax incentive for first-time home buyers expired, existing home sales reached their highest level in eight years.  April sales were revised up by more than 1k sales a day (at an annualized pace).  Finally, a third of the home buyers were first time buyers.  And for those who insist on being skeptical of government, note that these figures come from the private sector (National Association of Realtors).  Last week, the US reported the best back-to-back housing starts since 2007 and permits jumped to their highest level in eight years. 

The US reports durable goods orders data today.  The decline in Boeing orders ahead of the Paris Airshow may keep the headline soft, but the details are likely to show that capital expenditures are improving in Q2.    GDP forecasts may be lifted with today’s report though economists may wait until after the household consumption data is reported later in the week.  

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