Euro Outlook - Why You Should Sell the Rally

• Euro Outlook - Why You Should Sell the Rally
• Dollar Snaps Back on Stronger US Data
• GBP: Hit by Surprise Drop in Retail Sales
• CAD Shrugs Off Strong Retail Sales
• NZD: Vulnerable Ahead of Trade
• AUD: Oil Down, Gold Unchanged

 

Euro Outlook - Why You Should Sell the Rally 

Today's rebound in EUR/USD amounts to nothing more than a relief rally.  Investors breathed a sigh of relief after the Greek Parliament voted to approve a second series of reforms, clearing the path for fresh bailout talks.  While the announcement was not made until early Thursday, the decision to pass the latest reforms was a given because the terms were "easier" to approve than last week.  The first set of reforms involved a higher VAT tax and pension cuts while the second set were mostly structural changes including a process to speed up judicial decisions and the handling of failed banks that would provide greater protection to savers'.  More controversial measures such as tax increases for farmers and phasing out early retirement won't be dealt with until August.  

We recommend selling into the EUR/USD rally because even though today's Greek Parliament vote clears an important hurdle there are many more to come.  European creditors will continue to question the government's ability to implement all of the reform measures and given the significant toll they will have on Greece's economy, Syriza will push to renegotiate as long as the ECB keeps the spigots open.  Both the ECB and IMF believe that debt relief is necessary but Germany will put up a good fight and their resistance will raise concerns about the talks breaking down and the renewed possibility of a Grexit.  Just today, ECB member Nowotny said they could consider extending the maturity of Greek debt.  August will be an important month for Greece because not only will the Parliament need to approve all of the reforms, but the Eurogroup will need to approve a third bailout package for Greece before the ECB's 3.4 billion bond repayment is due.  Also Prime Minister Tsipras could call for a snap election in the fall that would lead to political uncertainty that is rarely good for a currency. The bottom line is that Greece is not out of the woods. The path ahead will be challenging and there will be many road bumps that will deter investors from buying euros.  

Technically, the EUR/USD rally also stopped at the 20-day SMA and the currency pair has not closed above the 20-day SMA in a month.  Eurozone PMIs are scheduled for release on Friday. Based on the drop in industrial production, factory orders and the ZEW, the odds favor a weaker report that could renew the EUR/USD's decline. 

Dollar Snaps Back on Stronger US Data 

The U.S. dollar ended the NY session unchanged to lower against all of the major currencies with the exception of the British pound.  Considering that jobless claims dropped to its lowest level in 40 years and the leading index beat expectations, today's decline is clearly fueled by an overbought dollar.  Investors have every reason to continue buying dollars as the case for Fed tightening hardens but with Treasury yields ticking slightly lower and USD/JPY struggling to break above 124.50, there was very little participation.  However this will change next week as we head into the FOMC rate decision and Q2 GDP report.  Growth is expected to have accelerated sharply in the second quarter, making policymakers more confident that the time for liftoff is near.  

At the same time, the Japanese Yen should be trading lower because Japan reported another trade deficit when it was suppose to report a surplus. Exports rose less than expected while the decline in imports was more moderate.  Last night, Prime Minister Abe also said they cannot say Japan has definitively escaped deflation which implies that he does not believe that they are ready to drop their easing bias.  The IMF also warned that without deeper cuts to curb unsustainable debt, Japan's debt to GDP ratio could surge to 290%.  

GBP: Hit by Surprise Drop in Retail Sales 

The British pound gave up all of Wednesday's gains following a surprise decline in retail sales.  Consumer spending dropped 0.2% in the month of June against expectations for a 0.4% rise. The decline in prices and volume of sales was completely unexpected considering that wages increased and labor market activity improved.  Demand for food, furniture, sporting equipment and jewelry all declined but even with the 0.2% drop, retail sales should contribute positively to second quarter GDP.  According to Office for National Statistics, the agency that releases the report, on an underlying basis, retail sales remains strong.   So while today's report is disappointing and sterling sold off as a result, it does not affect our view that the Bank of England will be the second major central bank to raise interest rates.  In fact Monetary Policy Committee member McCafferty warned today that they must be careful not to raise rates too late.  Wage growth is faster than expected and an early start to rate rises would enable gradual moves ahead. 

CAD Shrugs Off Strong Retail Sales 

The gravitational pull of 1.30 for USD/CAD is strong.  Despite better than expected retail sales, the Canadian dollar refused to rise.  Consumer spending rose 1.0% in the month of May, 0.9% ex autos to a record high and yet traders refused to let up on the currency.  The problem is oil, which continued to fall. For the second day in a row, WTI crude settled below $50 a barrel.  If oil prices refuse to stabilize, a new 10-year high in USD/CAD becomes likely.  Meanwhile the New Zealand dollar held onto its post RBNZ gains.  This is a classic sell the rumor buy the news type of price action. Ultimately we expect NZD/USD to trade lower because the central bank could still lower rates.  New Zealand's trade balance report is scheduled for release this evening and given the sharp decline in dairy prices the risk is to the downside.  Finally AUD/USD ended the day unchanged, right dab in the middle of its 2-week long range.