Dollar Broadly Firmer as Greece Decision Delayed

BBH CurrencyView

• Dollar broadly firmer as decision on Greece is delayed until July, Stocks and oil under pressure
• Global markets this week are likely to be dominated again by developments in Greece; EUR near 1.42
• Beyond Greece markets are also likely to focus on FOMC statement and European surveys this week

Markets remain in risk off mode and the dollar broadly stronger, driven by the familiar uncertainties surrounding a deal for Greece. The euro is 0.5% lower near $1.424, but the pair briefly dipped under 1.420 overnight. The Australian dollar gave back most of its Friday gains against the USD, falling nearly 1% on the day to 1.052 on declining commodity prices and negative risk sentiment. The Swiss franc is the only currency gaining against the USD, up 0.15% to 0.8470. Greek 2- and 10-year yields are up nearly 40bps and 70bps, respectively, but are still 60bps lower on net after Friday’s sharp declines. Yields on Portuguese sovereign debt are up some 20bps, but beyond that, moves have been subdued with US Treasuries and core European yields down no more than 3 basis points. European equity indices are sharply lower, led by a 2.5% decline in the Italian market, exacerbated by weaker-than-expected industrial orders data. The Nikkei managed to close flat but most other Asian bourse were lower and S&P futures are pointing to a 0.5% negative open. WTI futures are being closely watched after the front month contract moved below 92 $/barrel, breaking the 200-day moving average. As expected, there was no major announcement by Chinese authorities on FX over the weekend and widening of the FX band.

Global markets are likely to be driven again this week by events surrounding Greece. While continued uncertainty over Greece is likely to weigh on sentiment and in turn spur broad dollar strength, there were some crucial steps taken last week that are likely to pave the way for some positive developments this week. Germany, for instance, softened its stance regarding private sector participation in a second Greek aid package. Likewise, the IMF appears to have softened its stance as well, which means that Greece will likely receive the next tranche of funding. Indeed, after intense political infighting over the week a new cabinet was appointed last Friday and with that the Prime Minister will seek a vote of no confidence in parliament no later than tomorrow. A successful vote, in our view, would pave the way for approval of the new austerity measures over the following days and in turn likely remove any potential hurdles on the disbursement of the next IMF/EU tranche of existing aid, assumed to be around €12bln. A failure to pass vote, on the other hand, is unlikely to be received well by the markets could prompt the euro decline further along with broader equity declines. In terms of the euro a downside break of the $1.42 level likely to open the door to $1.40 and indeed a full retracement of the late May move. Nonetheless, a second EU deal might come in time to prevent a global crisis but it is likely too late for Greece. Greek 2yr yields fell sharply by 166bps on Friday after Germany and France agreed in principle on a role that private creditors should assume in the next aid program for Greece. However the cost of 2yr Greek debt stayed up 183bps on the week and at 25% this morning (-13bps) remain in critical territory. A Greek default is inevitable, the only question is about the timing and by association how well euro zone and G7 finance ministers manage the global fallout once losses on Greek debt are realized.

Beyond Greece the two key events in the G10 for the upcoming week are the FOMC meeting and the subsequent press conference. We expect the Fed to remain on hold and but more importantly to signal "exceptional low levels for the federal funds rate for an extended period”, with limited changes from the previous statement. Overall, the statement and press conference are also likely to be interesting given the Fed’s current challenges due to the recent deterioration in the macro data. In any event, we expect the chairman to acknowledge the recent deterioration in the US data but again to suggest that the recent soft data is temporary in nature and is likely to reverse course later on in H2. The press conference is also likely to be watched to for comments in regards to QE3. We continue to think the bar is set very high on this front and expect him to repeat that the balance of risk is not in favor of further asset purchases. Comments about the committee’s views on adopting a formal inflation target may also feature in his commentary. Elsewhere, on the data front we will find out whether European survey data (PMI and Ifo) and US durable goods orders confirm this trend of cyclical deceleration or whether they point to cyclical divergence across the Atlantic. On the whole, we expect the combination of the rise in the fiscal risk premium in Europe due to rise in political uncertainties over Greece along with the expected moderation in European data to be positive for the USD and CHF, in particular, and to a lesser degree GBP.