BBH CurrencyView
- Dollar is mostly weaker against the majors into Greek austerity vote; global equities rally strongly
- The euro remains firm near $1.444 ahead of vote; momentum likely to continue but hurdles remain
- Rumors of a potential Chinese rate hike this week surface; Turkish central bank views on lira
The dollar is weaker against most major currencies on the back of growing enthusiasm into the Greek austerity vote. The euro is broadly higher, up 0.3% against the dollar, continuing the recovery seen during yesterday’s session and now up for a third straight session. Sterling is tracking the euro higher but lagged gains as it was bogged down yet again by soft economic data, including consumer credit and mortgage lending. The boost in risk appetite has underpinned strength in the dollar bloc and tempered back demand for safe havens. As a result, the Swiss franc and yen are broadly lower, with the EUR/CHF falling short of 1.20 as euro buying momentum ebbs after a 0.4% advance. Remarks from Fitch and S&P, suggesting that they won’t automatically view the French rollover scheme as a credit event have also added to the positive momentum. Indeed, the main European indexes are over 1%, with European stocks climbing for a third day, while most Asian markets closed with robust gains.
The markets will again be focused on Greece with the key parliamentary vote on the medium-term fiscal strategy (MTFS) and the legislative changes needed to implement the program. Although there is no official time set for the vote, roll call begins at 7:00EST. Judging by the recent price action ahead of the meeting, markets appear to expect that a slim majority of the ruling PASOK party will be the most likely outcome and in turn a simple majority vote is likely to ensure the disbursement of the fifth EU/IMF loan tranche. While a few voters have publicly defected since last week’s confidence vote, brining the PASOK majority down to 153 from 155, we continue to expect the parliament will approve the austerity program. The euro (along with market sentiment) is likely to rebound in the short-term on the news as immediate Greek default fears mitigate, leading to a decline in the fiscal risk premium. As a result, periphery spreads are likely to narrow relative to Germany, while CDS prices also decline, which in turn is likely to dampen safe havens and lead to pressure on German yields, pushing them higher. Altogether, these are channels to euro strength with a near-term target of $1.455 in the coming weeks on successful votes. That said, however, euro upside could be capped by several key hurdles that remain, including the vote on the implementation (due later in the week) and issue of private sector participation in the second aid package expected to be negotiated at subsequent Eurogroup meetings on July 3 and 8. Alternatively, with a “Plan B” being denied by European policy makers (potentially to try to mitigate any moral hazard) a no vote is likely to take the euro below $1.40 and into freefall, leading as well to further retrenchment in the equities and commodities. Altogether, while we expect a no vote to be a tail risk at this juncture, an upside break in the euro through $1.445 is needed to continue the recent momentum over the next couple of days.
In China, rumors about a rate hike as early as this weekend along with growing concerns about NPL issues led stocks to underperform its regional peers. Yesterday, the PBoC rose the rate in its 1-year bill yield auctions by 9.63%, which many interpret as a sign of coming tightening. The later issue revolved around a report suggesting that a financing vehicle of the Shanghai government cannot repay its loans and has requested an extension. The combination of still elevated inflation, tightness in the inter-bank market and growing concerns over the banking system will lead to a shift in how authorities use monetary and credit policy tools, in our view. We expect a move away from tightening bank lending quotas and reserve requirements to increasing interest rates. The later will reduce the negative interest rate retail investors are facing, hence increase or at least stem deposit outflows. Turning to Turkey, the central bank has given another sign that it is becoming uncomfortable with the speed and magnitude of lira depreciation. The government again decreased the size of its daily auction. But similarly to the last time, the size of the reduction was trivial (from $40 to $30mn per day), hence the TRY gain following the announcement were short-lived. In our view, the risk is growing that the central banks will start to signal that an increase in interest rates is forthcoming. This could be the right time to start gradually building long TRY positions, but for now, we suggest using intra-regional relative value trades.