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Currency Market Analysis

Jun 29, 2015 | Currency Market Analysis

Global Themes

Greece appeared all but certain to default on its debt this week, news that had safe harbor assets in high demand, boosting currencies from the U.S., Japan and Switzerland. Weekend talks between Greece and its creditors were seemingly over before they started after the Greek premier said he would put the decision on whether to accept creditors’ proposal for more aid to a national referendum. Greece will vote on the aid package in a referendum set for July 5. In the interim, Greece imposed capital controls and gave its banks the entire week off. Markets initially punished the euro which plunged overnight to four-week lows. As the euro entered U.S. trade, however, it was only modestly weaker, finding a helping hand in central bank intervention on the part of Swiss authorities who sold francs and bought euros in a move to dissuade the safe haven seeker. Underlying euro sentiment remained bearish, however, particularly if America’s jobs report on Thursday should strengthen an already solid case for the Federal Reserve to increase interest rates. Greek uncertainty and holidays this week in Canada and the U.S. should keep market action highly volatile.

USD

The dollar was on a mixed but mostly stronger footing, buoyed by safe haven flows driven by Greece’s still festering debt crisis. The buck, however, slid to one-month lows against the yen and squandered an earlier multiweek high versus the Swiss franc. The dollar this week should take its main cues from haven flows and America’s jobs report which is due for release Thursday, a day earlier than usual, due to the U.S. holiday Friday to observe Independence Day. The dollar would stand to receive a fundamental boost should the June jobs report come close to forecasts of 230,000 and 5.4% unemployment as it would dial up pressure on the Fed to boost rates.

CHF

It’s tough – and expensive – to keep a good safe haven currency, like the Swiss franc, down for long, particularly with the thick fog of risk aversion permeating markets. Switzerland took action to discourage safe haven seekers from bidding up its currency, a negative for the export-driven economy. Swiss authorities acknowledged intervening earlier to weaken the franc and shore up the euro which has been hit hard by the worsening Greek crisis. Currency market intervention tends to pack a limited punch, though, suggesting broader market forces would likely prevail sooner or later.

EUR

The euro cut losses after it plunged overnight to four-week lows as the weekend came and went without a deal to keep Greece fiscally sustained for the foreseeable future. The Greek debt sage rages on, keeping open the possibility that Athens would default on the €1.6 billion it owes the IMF by Tuesday. In a surprise decision, Greece’s premier put the ball in the nation’s court, asking the country to vote in a referendum on July 5 whether to accept a deal from its creditors that is expected to lead to more fiscal belt-tightening for its people. The worsening Greek crisis risks deepening already bearish euro sentiment, particularly if the situation should deteriorate further, deal a setback to the bloc’s nascent recovery and lead to stronger stimulus from the ECB.

GBP

Sterling’s general inclusion in the safe harbor cachet of currencies helped limit its decline against the dollar. The pound steadied after nearing two-week lows at the height of the market upheaval overnight. The pound isn’t seen as totally out of the woods should the Greek situation worsen and lead panic investors to ultrasafe, dollar-denominated assets. Sterling should find a fundamental driver in U.K. data Wednesday on manufacturing, and services growth on Friday, with improvement on the cards for both surveys.

CAD

The loonie started the week in subdued fashion with markets rattled by Greece’s still raging debt crisis. Oil prices softened and kept below $60, weighing on the commodity currency. Risk-wary investors also chose the safer dollar to the south which often thrives when market confidence crumbles. Canadian wholesale inflation fell 1.3% in May, improving from April’s 2.4% decline.


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