Dollar Rallies In Asia And Europe, May Pull Back In North America

The strong upside momentum for the US dollar seen last week is carrying into today's activity. It was firm in the holiday-thinned trading yesterday but has jumped higher today. There are two chief drivers.

The first were comments by several Fed officials, including Yellen and Fischer, reiterating that the weakness in Q1 was likely transitory, and stronger growth will allow for a rate hike later this year. Fischer, who will speak on the global economy later today, framed the rate hike issue as "early and gradual or late and steep." It seems clear from numerous speeches that at least the Fed's leadership prefers the former over the latter.

The second is Greece's payment to the IMF, which next week is in question. Of course, this is not the first time the Syriza government has suggested it would not make a debt payment, which it later made. However, given the large payments due next month, and the fact that the last payment was made by tapping an emergency fund at the IMF itself, there is a sense that the long elusive brink is near.

That said, there is a maneuver by which Greece could bundle the various payments to the IMF into one payment and buy a little time, but it needs to formally request permission from the IMF, and it has not done so, nor would the IMF necessarily accede to this. Prime Minister Tspiras has reportedly called an emergency meeting with the Greek negotiating team. Greek bonds have been crushed, but the stock market is bucking the regional trend and posting minor gains.

Most investors and policy makers have little sympathy for the Syriza government. However, it must remembered that the official creditors cut off aid payments to the previous government almost a year ago, which may have helped fuel the election outcome in the first place. It is now fairly well documented that the initial aid packages were not designed to put Greece on a more sound and competitive path as much as to build a firewall to avoid the contagion.

With the success of the anti-austerity Podemos in the local and regional elections in Spain over the weekend, the official creditors are in a difficult position. Any concessions to Greece, even if they were so inclined, would be seen as emboldening the others. No wonder Spanish Prime Minister Rajoy was often among the most severest critics of the Greek government. Spanish and Italian bonds are under pressure today. Spanish 2-Year and 10-Year benchmark yields are have risen 1-2 bp more than Italian bonds yesterday and today. Spanish stocks are underperforming Italian shares though this has been the case for much in recent months.

The euro had approached the $1.15 level in the middle of May. Its two-month recovery had spurred talk in some quarters that its decline was over. The positioning in the futures market suggested, however, that its gains were corrective in nature, and a function of short covering. We had suggested a break of $1.0960 could spur a move toward $1.0840-80 initially. Today's low in the European session has been $1.0885. This may have exhausted the selling pressure for the day. Upticks back into the $1.0920 (lower Bollinger band®) to the $1.0940 area would alleviate the immediate technical over-extension.

The dollar has rallied to new post-crisis highs against the Japanese yen, reaching almost JPY122.90 in the European morning. This too seems to have exhaust the buying and a pullback in North America would not be surprising from the technical perspective. It is difficult to link the yen's drop to a new fundamental factor, outside of the ongoing portfolio diversification of Japanese pension funds and speculation over the timing of the Fed's lift-off. US Treasury yields are softer, and Japanese stocks managed to eke out only a minor gain (the Nikkei was up less than 0.2%).

Sterling's weakness is largely a function of the firmer dollar environment. It tested the $1.57 area in the second half of last week and was briefly pushed below $1.5400 today. The selling pressure also appears to have climaxed for the day. There is scope to recovery toward $1.5440-60.

There is much talk of Cameron’s post-electoral push to renegotiate the terms of EU membership and treaty changes. However, it appears that Germany and France want to move nearly the opposite direction, which is to move toward greater integration without treaty changes. This may not be an immediate market factor, investors will monitor these developments closely.

The US economic calendar is chock full today. The April durable goods orders may be the most important, but it is not the only data on tap. S&P/CaseShiller house prices, the Richmond and Dallas Fed’s manufacturing survey, and the preliminary Markit PMI are to be reported.

The Bank of Canada meets tomorrow. No change in policy is expected. The shift to a net long speculative Canadian dollar positions as of May 19 (for the first time since last September) seems premature. The US dollar has carved out a bottom against it, and last week’s close above CAD1.2250 was important. It is testing the CAD1.2380 area now, which corresponds to a retracement objective of the two-month slide. The next objective is near CAD1.2480, but might need a dovish BOC to spur.