'Greece deadline this time for real, IMF under enormous pressure' - Simon Smith, FxPro

 

   Simon
   Smith

PROFILE:
• Current Job: Chief Economist for FxPro
• Career: Holds an MSc. in Economics from the University of London and a BSc. from Brunel University. He has held economic and strategy positions with Standard & Poor’s.

View profile at FXStreet

Simon Smith has over seventeen years experience of macro forecasting and investment strategy research. Prior to joining FxPro in May 2010, Simon was a consultant with Thomson Reuters, having spent four years as Chief Economist at Weavering Capital. 

Simon has held economic and strategy positions with Standard & Poor’s, together with consultancy firms 4Cast and MMS International. He holds an MSc. in Economics from the University of London and a BSc. from Brunel University.

What do you think will be the most important event this week for the FX market: ECB, NFP or the Greek debt deadline?

I think it has to be Greece. This may have been said many times before, but all the evidence and rhetoric suggest that this time is for real. The coffers are literally running dry. The proposition that is on the table today is not labelled as a “take it or leave it” deal, but that is pretty much what it amounts to. All parties have spent an inordinate amount of time dealing with the Greek situation over the past weeks and months and naturally patience is wearing thing. If Greece does not accept, then I think it’s likely they will default. The IMF is itself under enormous pressure because they have given more concessions and ground to Greece than many feel has been right and has been out of kilter with their approach to other lending.

Do you think these events will be USD-positive and EUR-negative?

Naturally a Greek default (or impending one) would be EUR negative in the short-term, of that there can be little doubt. As I’ve said previously, Greece will leave the euro at some point. Nothing lasts forever in terms of exchange rate and monetary regimes and the single currency in its current form is no exception to that rule. But trying to quantify exact timing is nigh on impossible, because that’s about the politics rather than economics. The economics will win over eventually. On a non-default scenario, then we are looking at a modestly positive week for the euro, unless payrolls is much stronger. This would not always be dollar positive, but the dollar’s correlation to data surprises has been notably stronger of late, so reacting positively to strong than expected data, so anything above 260k level (expected 220k) would negate this modestly euro positive view (providing no surprises on unemployment rate or earnings).

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 The RBA kept the interest rates at record low are 2% but market still seems to be expecting further cuts. When do you think that will happen?

After the RBA statement this week and the GDP data out overnight, the market expectation of further easing is pretty limited. If we look at forward overnight rates out to the end of the year, they are suggesting only a marginal charge of a further 25bp easing by the end of the year (less than 20% chance). I think we are likely to see at least one more cut. Much of the growth seen in the first quarter was driven by a running down of savings so it’s questionable whether the pace will be sustained through the remainder of the year. As such, what we’ve seen so far this week looks to be more like corrective short-covering rather than the start of a more sustained recovery in the dollar.

What direction do you expect the AUD/NZD to go on the long-term?

For the past 3-4 years this has been mostly about a broader downtrend, interspersed with corrective moves. But over the past week this has been pretty aggressive, thanks initially to the weaker kiwi, but more recently on the back of the recovery in the Aussie seen this week. The broader picture still favours a move back towards parity. As mentioned above, a further easing on the Aussie side looks likely and the RBA are still being relatively vocal on their belief that the currency should be lower in the future. An easing from the RBNZ (where rates are at 3.5%) is possible, but it depends in part on the success of measures by the RBNZ to curtail house prices via other means. If they are successful, then an easing is likely, but if seen this will be towards the tail end of the year.

Oil keeps trading around the 60$ mark ahead of the OPEC meeting. Do you think the event will have an impact on the crude price?

Personally, I don’t think it will. Naturally there was a greater focus towards the tail end of last year when the price was below the 50$ level and OPEC stood on the sidelines. I don’t doing anything ‘official’ to change their stance this time around. All the noises suggest that the main OPEC member countries are content with the recent moves in the oil price and have no reason to rock the boat.