By Kathy Lien, Managing Director of FX Strategy for BK Asset Management.
- Greece Votes No. Time to Buy or Sell Euros?
- Dollar: How the Greek Crisis Affects America
- AUD: RBA vs. China
- CAD Hit Hard by Data and Oil
- NZD Rebounds after Hitting 4.5 Year Lows
- GBP: Big Beneficiary of Anti Euro Flows
Greece Votes No. Time to Buy or Sell Euros?
Greek voters rejected austerity this weekend and to everyone’s surprise there isn’t an all-out collapse in the financial markets. The euro sold off, bond yields in Europe spiked and investors dumped European stocks. But the declines were controlled with both currencies and equities ending Monday off of their lows. Many investors thought EUR/USD would fall by at least 1.5% -- maybe even 3% -- if the Greeks voted 'no'. And while it gapped lower on Sunday, the euro recovered like a cat with nine lives in the hours that followed. That rebound reflects the ongoing hope that with a new Finance Minister and the support of the people, Prime Minister Tsipras and the Greek government will finally reach a deal with its creditors. Investors are encouraged that Varoufakis has been replaced by an Oxford educated man who supports maintaining the euro. Unfortunately we don’t see an easy or smooth path to a deal and fear that the 'no' vote could backfire on the Greek government as time is running out. The ECB maintained the ELA on Monday but adjusted the haircut on collaterals, which will make life difficult for some banks. We don’t expect any breakthroughs at Tuesday’s Eurogroup meeting. It's going to be a long 2 weeks with a number of emergency meetings before the July 20 ECB payment deadline, which should translate into chaotic trading in the financial markets. The ongoing uncertainty will be negative for the euro and risk appetite. Therefore we like selling euros on the 1.11 handle. Anywhere below that provides poor risk reward.
Dollar: How the Greek Crisis Affects America
While there was very little consistency in Monday's U.S. dollar, Greece's 'no' vote on austerity has a clear and unambiguous impact on Fed policy. First and foremost, oil prices have fallen sharply, reducing pressure on the Federal Reserve to raise interest rates. Lower prices means lower inflation and more natural support for the U.S. economy. Secondly, it will be difficult for the Fed to justify tightening if the Greek crisis creates more volatility for U.S. markets. So far, the impact has been limited but only because investors are waiting to see how things play out. Monday’s better-than-expected non-manufacturing ISM index provided little to no support for the dollar although that may be due in part to the increase falling short of expectations. For the time being, investors will discount positive U.S. economic reports on the premise that the timing of liftoff will hinge on the turmoil that the Greek crisis causes for U.S. markets. Monday’s dramatic reversal in U.S. stocks is both encouraging and surprising but everyone knows that it's an evolving situation that could improve or deteriorate just as quickly. While U.S. assets remain more attractive and less risky than European assets, Greek uncertainty will limit gains in USD/JPY. We still like U.S. dollars but prefer to buy USD/JPY on the 121 handle because investors will be skeptical about the Fed raising rates in September before there is more clarity on where Greece is headed. Tuesday’s U.S. trade balance report is not expected to have a significant impact on the dollar.
AUD: RBA Vs. China
The top story in the financial markets on Monday was Greece, but the wild ride in Chinese equities should not be dismissed. After falling more than 28% over the past 3 weeks, the Shanghai Composite Index opened 7.8% higher on the back of bold steps by the Chinese government to end the rout. In the past week, the Chinese government suspended IPOs, offered a new line of credit to support margin financing through China Securities Finance Corp and had their 21 largest brokerage firms commit to keep buying stocks until the Shanghai rises from its current level of 3,775 to 4,500. Unfortunately it seems that investors are not convinced that this will be enough as stocks gave up more than half of their earlier gains to end the day up just 2.4%. The Chinese government isn’t done -- there’s now talk that it is planning to inject massive liquidity into the financial markets. All of this should be positive for the Australian and New Zealand dollars but unfortunately investors have interpreted the frenzy of measures from Beijing as desperate efforts to contain the losses AFTER the bubble burst. The vulnerability of China’s economy, the drop in iron ore prices and the uncertainty created by Greece doesn’t bode well for Australia’s economy. The Reserve Bank of Australia was set to meet Monday evening and while it may be happy with the AUD's decline, it could express concerns about the outlook for the economy, especially given the drop in manufacturing activity and flat spending consumer spending. The only good news was from the labor market but job growth is expected to slow significantly in June after rising strongly in May. Meanwhile the Canadian dollar was hit hard Monday by weaker economic data and lower oil prices. Manufacturing activity grew at a significantly slower pace in June with the IVEY PMI index dropping to a 3-month low of 55.9 from 62.3. Oil prices also fell to its lowest level since April. We expect these forces to drive USD/CAD above 1.27.
GBP: Big Beneficiary of Anti Euro Flows
On a day like Monday, it is not surprising to see safe-haven currencies such as the Japanese yen and U.S. dollar perform well. However some investors may find the strength of sterling unusual. Next to the yen and dollar, sterling was the day’s third best-performing currency. No economic data was released from the U.K. (although industrial production is due on Tuesday) and the only comments from U.K. officials are those calling for a “sustainable solution” for Greece. Instead, sterling has become a big beneficiary of anti-euro flows. With the fate of the euro in flux, the proximity of U.K. banks and the intimate trade activity makes sterling the natural choice over dollars for some investors. U.K. banks also have limited exposure to Greece. According to the Economist, British banks have less than 1% of their equity capital exposed to Greece. This contrasts with the 60% exposure to Italy, Spain and Portugal. Contagion is a serious risk for the U.K. but investors don’t seem to be worried about that right now.