The Greek parliament voted through the bailout deal with a large majority and the focus shifts now to temporary liquidity provision to get the wheels of the Greek economy and financial system ticking over again amid the assumption that other EU parliaments (the most important being Germany) will vote through the deal. An interesting point from here is that the International Monetary Fund has declared that Greece’s debt load is unsustainable, which in theory makes it unable to provide any further assistance. As well, the political turmoil in Greece is far from over, as the divisions in Syriza over this deal will make it difficult for Tsipras to rule.
Fed chief Janet Yellen’s testimony yesterday largely met our expectations as she maintained an optimistic tone and the expectation that rates could rise “this year” if the incoming data is supportive. Yellen tried to stress that rate hike timing is far less important than the pace of the removal of accommodation. The reaction in the forward rate expectations was very mild to non-existent, but the USD found strength nonetheless.
One wild card issue for the US dollar that is potentially quite large and one that has lain dormant for eons is that of US corporate profit repatriation. A pool of more than $2 trillion in US corporate earnings lies abroad due to the US tax regime requiring taxing on already taxed foreign earnings, meaning that these earnings are not repatriated unless special tax breaks incentivise companies to bring this money home. Now, it appears that a bipartisan deal in the US Congress is shaping up that could set the rate for repatriated earnings permanently lower and link the tax revenues to highway funding. Those who have been in the market for a while should recall the 2005 Homeland Investment Act (HIA), which supported the greenback all year with enormous repatriation flows.
The Bank of Canada’s very dovish guidance took the loonie for a lashing behind the shed, as the bank has obviously significantly raised its concern on the outlook for the Canadian economy, expecting significantly lower growth from Canada this year amid an expected 40% drop in oil and gas investment. USDCAD should have an easy time vaulting above the 1.3000 level from 2009 and continuing the uptrend from here, assuming the US economy maintains a head of steam.
The kiwi was sharply weaker overnight again as major milk producer Fonterra announced job cuts in a bid to consolidate operations after another another sharp drop in milk prices (New Zealand’s most important export). Additionally, the Q2 CPI data came in slightly weaker than expected despite the tremendous weakness of the kiwi in Q2, all pointing to a Reserve Bank of New Zealand that will continue to slash rates this year as rates at the front end of the curve are at their lowest level in modern history. The RBNZ has plenty of policy room to work with considering New Zealand’s official cash rate still stands at a hefty 3.25%. The market is only looking for slightly more than 50 basis points of further easing over the next year, but if this news flow continues, why can’t we see a policy rate at 2.00% eventually, or even lower?
Chart: NZDUSD
A powerful new sell-off wave in NZDUSD, but note the very well defined channel with support coming in here ahead of next week’s RBNZ meeting, so bears may find better levels to sell at tactically in the days ahead, though the room for further cuts from the RBNZ suggests that we could eventually trade below 0.6000 as long as the Fed moves toward hiking rates in the months ahead.
The G-10 rundown, brief version:
USD: little incoming data through the end of next week, looking for rally to continue after upbeat Yellen.
EUR: ECB likely wanting to encourage the idea of liquidity as far as the eye can see. This and stronger risk appetite the key arguments for weaker EUR.
JPY: Strong risk appetite a JPY negative, and if global long interest rates head higher, broad JPY directionless could yield to more pronounced weakness.
GBP: Firing on all cylinders, impressive resilience to yesterday’s weak UK data – GBPUSD getting a bit overdone soon, though we may remain in range.
CHF: Searching for a catalyst to differentiate it from the euro – USDCHF is attempting to make a break this morning above key zone – will this garner significant notice?
AUD: Strongly rallying again versus the hapless kiwi, but poking to new lows for the cycle against the USD on the weight of USD buying. Important for us to hold the new lows through the end of today’s session if we’re to see the bear market continuation. Reserve Bank of Australia minutes up on Monday are the next event risk for Australia.
CAD: A straightforward case of a very dovish central bank driving CAD lower – USDCAD nearing big 1.3000 area.
NZD: Very weak, and possibly getting short term overdone if we look at the channel in NZDUSD with an eye towards next week’s RBNZ meeting.
SEK: EURSEK trading in line with euro weakness and not much else, though this is a strong performance for SEK, considering the recent dovish Riksbank and ugly CPI figures, suggesting that the SEK valuation may have a hard time getting much weaker.
NOK: Preferring to look lower in EURNOK, but would be helpful to see a close below the 8.85 level.
Economic Data Highlights
- New Zealand Jun. BusinessNZ Manufacturing PMI out at 55.2 vs. 52.0 in May.
- New Zealand Q2 CPI out at +0.4% QoQ and +0.3% YoY vs. +0.5%/+0.3% expected, respectively and vs. +0.1% YoY in Q1.
- New Zealand Jul. ANZ Consumer Confidence dropped to 113.9 vs. 119.9 in Jun.
Upcoming Economic Calendar Highlights (all times GMT)
- Euro Zone ECB Meeting (1145)
- Euro Zone ECB President Draghi press conference (1230)
- US Weekly Initial Jobless Claims (1230)
- US Jul. Philadelphia Fed Survey (1400)
- US Jul. NAHB Housing Market Index (1400)
- UK Bank of England’s Carney to Speak (1800)
- US Fed’s Yellen to Testify before Senate Banking Panel (1830)
- US May TICs data (2000)