Dollar Selling Resumes

BBH CurrrencyView

• Dollar selling resumes as equities and commodities recover after US employment report
• Euro moves back near $1.44 after EU officials discussed further aid to Greece
• Dollar likely to remain on back foot this week; Growth currencies likely to outperform

The dollar continues to lose ground against most major currencies, especially Scandinavians, but European equities are now on the red and S&P futures pared back much of early gains. EUR/USD is holding above the $1.44 level, NOK and SEK are up over 1% against the dollar and USD/JPY is slightly higher, but still trading below the key 81 level. The intraday losses in European equity indices followed the announcement of lower-than-expected earnings by a large European bank. European sovereign debt are little changed but Greek yields are higher around 15bps across the curve. The rebound in commodity prices continued through the London morning with WTI and Brent futures now up 3%, gold up 1.5% and silver up 4.5%.

The unscheduled meeting late Friday evening between senior euro zone financial officials represents official recognition that Greece will require additional assistance, while exit from the euro zone is unlikely at this juncture. Indeed, the meeting does not mean that Greece is exiting the euro, but that officials are reviewing various options to help Greece. Following the meeting, Juncker said “we think that Greece does need a further adjustment program”. The initial Greek package has already been adjusted, with interest rates lowered and maturities extended. In many past debt crises, easing repayment terms has been insufficient, and ultimately required some sort of reduction to the debt level itself. The discussions now appear to be on how best to provide Greece with additional help in a politically acceptable manner. The May 16 summit of European finance ministers now takes on additional importance. Meanwhile, German export data this morning was well beyond expectations at +7.3% m-o-m, and continues to show the split in economic performance within Europe, particularly between Germany and the periphery. Periphery 2-year yields are higher today, including Spain’s, and as well, periphery bank stocks are all underperforming their general equity markets today. Yet, the euro is stabilizing ahead of $1.440 after the 4% drop late last week. A move holding above $1.450 would provide confidence that the position squaring following the ECB meeting has been unwound, while a break below $1.4300 would likely lead to a test of the 1.4150 April low. Separately, the Chinese-US Strategic Economic Dialogue is being held in Washington today and tomorrow. The meeting is not expected to generate significant headlines. We will be issuing a Special FX report later today on Chinese financial conditions. China allowed CNY appreciation before the meeting, although last week was flat, and we expect China to allow the appreciation to continue.

The unexpected rise in the US employment data last Friday is likely to go a long way in allaying investor fears about global growth (which dominated price action last week), yet not strong enough to raise concerns that the Fed is likely to shift its posture on rates. As such, relative interest rate spreads and the divergent outlook for central bank policy are likely to remain the important driver of currencies in the week ahead and indeed over the medium-term. In our view, that means that last week’s clearing out of long positions in “high-yielders” and thus the short-covering of USD, JPY and to a lesser degree CHF is likely to be reversed in the week ahead. Indeed, the sharp decline in the higher-yielders over the past week is likely to provide attractive entry levels in AUD, NOK, SEK and CAD. We expect this to lead to renewed weakness in the dollar while the “growth” currencies should experience a bit of a recovery, with the expected rise in Chinese economic data to provide additional support. Likewise, the weakness in the dollar is likely to be reinforced by a deceleration in economic data, with April retail sales expected to slow from last month (though producer and consumer prices are expected to marginally increase on the back of higher commodity prices). Elsewhere, sterling is unlikely to get much a boost this week as the May’s inflation report (Wednesday) is expected to be bit on the dovish side in terms of tone and posture. The BoE, for instance, is expected to cut its growth forecasts again, from 2.6% in the previous report, which is likely to soften the outlook for inflation and thus the outlook for rates. This, in turn, is likely to confirm that the MPC is expected to remain on hold through Q3 and create a less supportive backdrop for sterling as other central banks move forward with rate moves.