We saw a vicious squeeze across the board in euro, purportedly on the prospects of an imminent deal between Greece and its creditors as well as a higher CPI print.
The Financial Times, among others, suggests that the deal put together by Greece’s creditors is so far from what the Greek side finds acceptable that it remains very much in doubt.
Eurogroup president Anton Dijsselbloem said yesterday that we could still be weeks from an agreement, but the market has taken things into its own hands a bit, judging from the euro squeeze and the pickup in EURCHF.
The potential for further upside in the latter may be considerable (several hundred pips) if we move toward a deal that keeps Greece in the union and is a “permanent” solution, ie, not some deal that merely extends the deadlines another few weeks/months.
Today is European Central Bank meeting day, and Mario Draghi’s performance at the press conference will be critical as one of the significant drivers of the euro squeeze higher was another spike in European sovereign bond yields yesterday – particularly bunds.
This is a follow up move after an enormous bond sell-off in late April/early May and comes despite a furious rate of ECB quantitative easing purchases that are ironically intended to keep bond rates (and one would think, bond market volatility in particularly) at very low levels – particularly for the periphery.
Peripheral yields have moved even more over the cycle since late April, although yesterday’s move was more intense in German debt. What can Draghi and company do to engineer a sentiment shift in European bond markets?
Draghi will need to come up with a big bazooka announcement today to get ahead of the bond market moves – something even akin to the July 2012 “whatever it takes” speech.
Australia’s GDP came in slightly stronger than expected and yields pulled higher still as the market unwinds Reserve Bank of Australia cut expectations out the curve, but we remain convinced that the market is the wrong way on both the RBA’s intentions and the prospect for Australia’s economy. And a few weeks from Q3, the Q1 data is ancient history…
Chart: USDJPY
While the USD bulls have suffered a major setback until EURUSD gets back below the 1.1065/1.1000 zone again, USDJPY is still in the clear and has plenty of room ahead of key support levels, starting with the 38.2% Fibo around 122.70 and the ultimate zone toward 122.00/121.50. Looking for a strong follow up move higher from wherever we find support if the US data today and Friday impresses.
The G-10 rundown
USD: On the defensive, mostly due to the EURUSD squeeze. It’s up to the data now to get the USD rally back on track through Friday’s employment report. I generally like the prospects.
EUR: Draghi and company will want to do “whatever it takes” today to get ahead of the bad nerves in the European bond market, as the sharp rise in yields – particularly at the periphery – since late April is defeating the entire purpose of their QE programme. If he succeeds in driving yields back lower and the US data is strong, we could suddenly find ourselves trading 1.0900 late Friday – but the situation is fraught with two-way uncertainty here.
JPY: Remains on the weak side as the consolidation against the USD was very gentle considering the USD action elsewhere and suggests the risk leans to the upside in USDJPY on strong US data releases through Friday.
GBP: Will be reactive to today’s UK Services PMI as EURGBP is an interesting one to watch for signs that the euro squeeze is fading.
CHF: More about the eventual situation with Greece than the general euro squeeze of the moment, as positioning is light in EURCHF. Eventually looking for a resolution/deal to engineer a strong rally – but timing remains hazy. In USDCHF, need to see a strong rally by Friday to believe in upside prospects.
AUD: Strong GDP sees AUD higher still – running out of room for the immediate bearish case in AUDUSD, where we need to stay below the 0.7800/50 zone and see a significant sell-off by end of the week to renew the risks of a major downside break.
CAD: A day of consolidation yesterday in USDCAD amid the USD weakness, and some further room to settle room without damaging bullish prospects, though we’d like to see support come in by the end of the week to keep the focus higher.
NZD: Has rallied to the immediate resistance zone at 0.7175/0.7200 in NZDUSD which bears will prefer remains in place on the weekly close to keep the pressure on the downside. Meanwhile, AUDNZD is pushing at the highs for the cycle, above which the next level comes in around 1.10, and the 2014 high up at 1.1300+.
SEK: EURSEK traders playing the range once again – shouldn’t be surprised there.
NOK: A bit too much upside too fast for EURNOK, perhaps, due to the general squeeze on euro positioning, but still potential for 8.90/9.00 zone if retracements remain orderly on the potential for a dovish Norges Bank meeting on June 18.
Economic Data Highlights
- Australia AiG Performance of Services Index out at 49.6 vs. 49.7 in Apr.
- Australia Q1 GDP out at +0.9% QoQ and +2.3% YoY vs. +0.7%/+2.1% expected, respectively and vs. +2.4% YoY in Q4
- Japan May Markit Services PMI out at 51.5 vs. 51.3 in Apr.
- China May HSBC China Services PMI out at 53.5 vs. 52.9 in Apr.
Upcoming Economic Calendar Highlights (all times GMT)
- Eurozone May Final Services PMI (080)
- UK May Markit/CIPS Services PMI (0830)
- Eurozone Apr. Unemployment Rate (0900)
- Eurozone Apr. Retail Sales (0900)
- Eurozone ECB Rate Announcement (1145)
- US May ADP Employment Change (1215)
- Canada Apr. International Merchandise Trade (1230)
- Eurozone ECB’s Draghi Holds Press Conference (1230)
- US Apr. Trade Balance (1230)
- US May Final Markit Services PMI (1345)
- US May ISM Non-manufacturing (1400)
- US Fed Beige Book (1800)
- US Fed’s Evans to Speak (1815)
- Australia Apr. Trade Balance (0130)
- Australia Apr. Retail Sales (0130)