Currency Market Analysis

May 27, 2015 | Currency Market Analysis

Global Themes

Strong US data resulted in moves of different degrees in various markets. In Bond Markets which should have been more sensitive to strong US economic data, interest rates rallied higher in expectations of higher rates, but by close had given up most gains. In FX markets, the US Dollar strengthened across the board hitting 8 year highs against the Japanese Yen. The Euro which was weighed down with Greece's debt crisis & the win by the anti-austerity parties in local elections in Spain sank further lower against the US Dollar. Equity markets which have quite rich valuations sold off massively. US companies like Nike, Apple, Procter & Gamble, Microsoft, etc. have seen overseas earnings hit in Q4 2014 & Q1 2015 and the strength of the US Dollar sent US equities sharply lower. US Treasury Secretary Jack Lew on Wednesday cautioned against underestimating the fallout from a new Greek crisis saying that it would be a mistake to think that this could have wider consequences. Yesterday’s spate of strong data in the US included Durable goods orders where the core number excluding the volatile transportation sector increased higher than expected at 0.5 percent. The housing sector had 2 bits of strong data with the CaseShiller 20 city Index increasing by 5 percent which was above market consensus at 4.7 percent. New Home Sales for April at an annual pace of 517 million was well above March’s 481 million. In Europe Greece missed another deadline in its talks & the IMF repayment of Euro 305 million could be well in doubt.


The deadlock in Eurozone on Greek’s negotiations continued with no expectations on an immediate resolution. German Finance Minister Wolfgang Schaeuble dismissed the idea that Germany’s tough stance in the Euro crisis was to blame for Greece’s woes. Since mid of last week, there have been sound bites from the Greek Government that they may not be in a position to repay the IMF loan of Euro 305 million due next week on June 5. In June Greece has about Euro 1.6 million of repayments due to the IMF and we could finally see the endgame emerge on the negotiations that have conducted for over 100 days since the Syriza Party assumed office. There are fears that Greek could resort to capital controls if they are not able to reach a deal on unlocking the bailout package. The key stumbling block here “economic reforms” demanded by the TROIKA is at the opposite end of the platform which got the Syriza party elected earlier this year. In German Gfk Consumer Sentiment for May improved further to 10.2 from 10.0 in April. In France, Consumer Confidence slipped slightly lower to 93 from 94 in April.


The Sterling Pond has now given up a substantial part of the gains posted after the crucial general elections earlier this month. The strong US Dollar has reversed some of these gains. There are expectations that the UK economy which has the fastest growth rate among G-7 countries could see a rate hike sometime later this year. This will support the sterling pound and we could see this factor push the Sterling Pound back towards 1.6000 as we progress towards the end of the year.


The Japanese Yen plummeted to eight year lows on the back of a strong US Dollar. The minutes of Bank of Japan’s April meeting indicated that the time frame for achieving its target of 2 percent inflation could be delayed. The minutes also indicated that the BoJ did not see a need for further easing now. Japan’s economy minister Amari said that rapid FX movements are undesirable and that the recent move reflects the strength of the US Dollar. The weaker Yen has been propelling stocks with the Nikkei 225 closing up for the ninth consecutive day and managed to ignore the large fall in US stocks yesterday.


The USD Dollar Index resumed its upward march moving higher for the fourth consecutive day. It traded a high of 97.497 today which is 4.36 percent higher than the low it traded earlier this month on the 14th at 93.133. The strength of the US Dollar and higher expectations of an early rate hike in the US sent Gold prices tumbling. Yesterday it fell 1.7 percent, trading a low of 41,185.35 tumbling from levels over $1,200 an ounce. The G-7 Finance Ministers are meeting currently in Germany and US Treasury Secretary Jack Lew warned about underestimating the fallout from a new Greek crisis.


The Canadian Dollar was hit on two fronts strong US Dollar & weaker Crude Oil Prices. Today we have the Bank of Canada meeting and the announcement is scheduled for 10.00 am EST. As per a poll by Thomson Reuters all 43 analysts expect no rate cut at today’s meeting. The key to watch out will be Bank of Canada’s outlook on inflation and growth. The sharp fall in the Canadian Dollar and crude oil sent Canada’s TSX Composite down by close to 1 percent. The Canadian Dollar has had in recent times a very strong correlation with crude oil prices and with the higher beta, it has been a favorite of hedge funds to take short positions given expectations of weak growth and divergence with the US with regards to monetary policy where interest rates could go higher in 2015 whereas in Canada had a rate cut in early 2015.

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