Dollar Set to Begin the Week on its Front Foot

BBH CurrencyView

• The dollar on its front foot amid concerns over Greek debt woes and global growth worries
• Ecofin meeting (15:00 GMT) to discuss Greece and finalize aid package for Portugal; EUR/USD tests recent lows near $1.405
• Equities/commodities remain under pressure; dollar bloc and EM currencies continue to decline

The US dollar is trading on a firmer footing as euro zone debt concerns continue to weigh on market sentiment, with news over the weekend that IMF chief Strauss-Kahn was arrested adding to uncertainty. The euro continued to struggle and briefly moved under $1.405 before supportive interest came in, but it was unable to hold levels near $1.415. Sterling is trading in narrow ranges, while the focus for sterling will be later on in the week amid a slew of UK data releases. The dollar bloc currencies, meanwhile, continue to remain under pressure as a result of the negative sentiment, which boosted the demand for safe havens. Global stocks remain under pressure with both Asian and European shares declining, with the Euro Stoxx 600 down for the third consecutive day. The 1.3% slide in the Dax is led by large banks amid reports that the government is putting pressure on the Bundesbank to support Greek restructuring. With stocks on the defensive bonds remain in demand, with the 2-year UST down 1bps, while the Uncertainty over the global economic outlook continues to hamper demand for commodities, with crude trading briefly under $98bbl.

The dollar continues to benefit from an unwind of crowded short positioning, with the most recent speculative positioning data indicating a $7.7bln shift in net dollar shorts. This unraveling of the one sided dollar trade has been the most pronounced against the euro, where a shift in net longs was the biggest mover in the last reporting week, decreasing by 7.4bln to 11.1bln, as of 5/10. And anecdotal evidence from last week’s price action suggests that further euro longs were likely trimmed as well. The triggers of the dollar’s recent advance appear to be a combination of a few factors that include the deterioration in market sentiment amid the slew of negative data reports, the emergence of fiscal sustainability in Greece and the signal from the ECB that a rate hike in June is mostly likely off the table. And despite the potential for further dollar gains amid broader concerns of global growth downgrades and the uncertainty over the Greece situation, the fundamentals still support continued dollar weakness over the medium-term. Indeed, this week’s Ecofin meeting will be key to watch in terms of the ongoing developments in the management of the Greek crisis, while today’s confirmation of the continued rise in inflation is another sign that the ECB is likely to hike again in July. Likewise, we have important data from the US this week that stands out as important forward-looking indicators that in turn is likely to suggest that the pace of growth in the US is continuing to moderate. As a result, weakness in US data could in fact lead to a stronger dollar as the global reflation trade continues to unwind. Altogether, while the global recovery over the past few months has for the most part been resilient and the recent pullback in commodity prices is likely to support the consumer in time, the recent bout of risk aversion has made the markets more sensitive to extended positioning, which has benefited the dollar. Yet in our view once this bout of risk reversion and position squaring ebbs, we believe the fundamentals remain consistent with a weaker dollar as the Fed remains on hold and other central banks remain committed to policy normalization.

Equities have been down worldwide as part of a repositioning of assets. The MSCI Asia Index closed at a 7 week low today, and many Asian currencies are now at 3 or 4 week lows vs the dollar including KRW, TWD, INR, SGD and NZD and AUD as well. Reasons include concerns of a slowdown in world growth impacting these countries, particularly through exports. Singapore April exports were released today and fell -1.8% yoy, vs expected +7.9%. Although the Japanese quake may partially explain the first drop in yoy exports since the financial crisis, this figure adds to the growth slow-down argument. CNY 12 month forwards are pricing in 1.9% appreciation, the least in a month as well. In Japan, concerns are mounting regarding the banks, as the government is pressing for concessions on TEPCO loans, to provide political space for government support on the liabilities from the ongoing nuclear situation. The politics surrounding the funding of the US government continues, with today being the original date pointed out by Geithner as requiring an increase in the debt ceiling. Now it is believed that the government can “juggle accounts” and delay a ceiling increase until early August, however, it is not clear that there is any progress yet in negotiations between Republicans and Democrats.