Dollar Bulls Trapped

The US dollar is under pressure today.  There are many small triggers but the news stream itself is relatively mild.  Ultimately, the inability to extend last week's momentum left the dollar bulls vulnerable.  As we noted, that the momentum the dollar enjoyed took place without the backing up of short-term US interest rates to support the dusted-off divergence narrative as the Greek situation returned to chronic from acute and the Chinese stock markets stabilized.  

The Greek parliament handily approved the new reform measures that remove the last hurdle to the negotiations of a third aid package in five years.  There are three issues to note.  

First, the banking measures that were approved allow for the bailing in of depositors and senior creditors starting January 1.  Greece finance minister reaffirmed yesterday that the bank recapitalization, for which the new package will earmark 25 bln euros, will be done later this year. There has been much debate about this, and some observers have suggested that it could still prove to be causa belli for a Grexit.   So many thought that a Grexit was imminent a couple weeks ago.  Often the first reaction in such a situation is simply to push the forecast out in time rather than admit being wrong.    

Second, the bills passed did not include ending the tax break for farmers, which is reportedly subject to widespread abuse.  The official creditors had insisted on this.  The failure to include it may have been driven by political considerations as it would have fueled more Syriza dissents.  It is expected to be including in new measures later.  

Third, Greece's next payment to the ECB is due on August 20.  It does not have the funds.  The idea is that if the new aid package can be agreed in early August, that would give the national parliaments time to approve it in time for the first tranche that would cover the ECB payment.  The EU's Moscovici said that negotiations could stretch out a bit more.  If this does happen, and provided there is progress, another bridge loan facility is possible.  

The euro reacted positively to actions by the Greek parliament.  The euro traded to about $1.1005, just shy of the 50% retracement of the drop since the July 10 high near $1.1215.  Reports that a group of mostly non-European investors will buy Germany's LeasePlan for four bln euros ostensibly added to the euro demand.  Support is likely seen near $1.0950 ahead of tomorrow's flash eurozone PMI.  On the upside, the 20-day moving average, which the euro has closed above since June 22, is near $1.1025.  Beyond there the 61.8% retracement objective is found at $1.1065. 

Sterling's advance was stopped in its tracks by an unexpected fall in UK retail sales.   A rise was expected to fan rate hike speculation.    Retail sales were forecast to have risen 0.4% but instead fell by 0.2% in June.  Although the May series was revised up a notch, it was insufficient to offset the disappointment.  Sterling was already lagging behind the euro, and the poor data saw sterling sell-off against the greenback, allowing the euro to extend its cross gains.  Sterling was turned back from nearing the recent highs above $1.5670.  It quickly fell to $1.5580 before finding a decent bid.  The implied yield of the June 2016 short-sterling futures fell four basis points.  

However, in the bigger picture, the tighter labor market, and upward pressure on wages, encouraged by some of the more hawkish MPC members, are what is spurring rate hike expectations.  While the retail sales data was disappointing,  it is unlikely to have lasting impact on the expectations of the timing of the BOE's lift off.  

The Reserve Bank of New Zealand cut the official cash rate 25 bp for the second time in six week.  It stands at 3.0% now. The  RBNZ has unwound two of last year's four hikes, and it says further easing is likely.  The growth outlook has deteriorated since June.

This is not surprising, but what is unexpected is that the RBNZ dropped its previous characterizations of the New Zealand dollar as being "over-valued" or "unjustifiably high."  This omission spurred a short-covering rally as well as sell the rumor buy the fact type of activity. The Kiwi is easily the best performing currency today, gaining 1.5% against the US dollar.  This has brought a little beyond its 20-day moving average (~$0.6680).  This is the first time since late-April it has touched this average.  

During this period, the New Zealand dollar has depreciated by about 16.2%.  However, today's rally seems exaggerated.  A September rate cut still looks likely, and that may not prove to be the end of the easing cycle.  This bounce in Kiwi has over-extended short-term technical indicators and may provide a new selling opportunity.  

Despite the biggest jump in exports in five months (9.5% year-over-year), Japan reported a small deficit (JPY69 bln) instead of a small surplus (consensus was JPY46 bln).  Most of the increase in the value of exports was due to price.  Volumes are flat.  Imports fell 2.9% and have been contracting for six months.

Exports to the US were up 17.6% while shipment to Europe were up 10.8%. Exports to Asia were up 10.1%, and to China 5.9%.   Japan's imports from the US rose 14.9%; from Europe, 6.5% and 7.0% from Asia (China 6.9%).  

The dollar has been confined to yesterday's range against the yen.  It is in a near-term of JPY123.60-JPY124.15.  The greenback tested the lower end of that range in early Europe, but with the help of cross rate pressure on the yen, the dollar recovered to the middle of the narrow range.  

Chinese stocks have rallied for the sixth consecutive session, which is the longest advancing streak since May.  The Shanghai Composite rose 2.4%, and the Shenzhen Composite rose 2.8%.   SAFE noted that capital outflows have slowed.  Margin use continued to rise yesterday (reported with a day lag), and the number of shares suspended (mostly small cap issues) continues to gradually fall.   Tomorrow, Caixin flash manufacturing PMI (formerly sponsored by HSBC) for China will be reported.  It is expected to tick up from June's 49.4 reading but remain below the 50 boom/bust level. 

The North American session features the US weekly initial jobless claims and leading economic indicators.  Outside of some headline risk, these are not the reports that typically move the markets.  Canada reports May retail sales.  They are to rise by 0.6% after falling by 0.1% in April.  The contraction in April GDP (after a negative Q1 GDP print) helped spur the Bank of Canada's recent rate cut.  A firm retail sales report today will help bolster confidence that Canada may be experiencing sluggish growth, but it is not in a recession.   

The US dollar rose to new multi-year highs against the Canadian dollar near CAD1.3055 but has been pushed down by nearly a big figure in amid the generally heavier tone.  Support is seen in the CAD1.2905-20 band, and a break would likely trigger stop-loss dollar selling.

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