EUR Hits 1 Month High, Is GREXIT a Blessing or a Curse?

• EUR Hits 1 Month High, Is GREXIT a Blessing or a Curse?
• Dollar Extends Losses Post FOMC
• GBP: 9 Days Without a Correction
• USD/CAD Bounces Off Support Ahead of Retail Sales
• AUD Soars on Higher Gold and Iron Ore Prices
• NZD Extends Losses after Weak GDP

 EUR Hits 1 Month High, Is GREXIT a Blessing or a Curse?

One of the best performing currencies today was the euro, which climbed to a 1 month high versus the U.S. dollar.  This strength was driven primarily by a decline in the greenback but the rise in the single currency 12 days before the June 30th deadline has many investors wondering whether a Grexit is a blessing or a curse for the euro.  The Eurogroup meeting ended today with neither side yielding on reforms.  Greece is in the headlines everyday now but the takeaway is the same, which is that no progress is being made. Yet the euro is rising while European bond yields are falling.  The strength of the euro tells us one of two things  - investors have faith that a deal will be reached or they think that the Eurozone is better off without Greece.  Considering that European officials are making contingency plans in the event of a Grexit, we doubt that the euro's rise reflects optimism. A deal is still possible if Greece yields on some pension reforms and we think this is likely especially on terms such as eligibility for early retirement and state support for supplementary pensions but the euro's refusal to fall reflects Greece fatigue and not optimism.  In the long term, a Grexit is a blessing for the Eurozone and the euro because it removes tail risk, indicates to other nations that moral hazard will not be tolerated and leave the Eurozone healthier.  Quantitative Easing and a weaker currency are helping to turn the economy around and without Greece we would be seeing stronger demand for European assets.  However in the near term, investors are underestimating the short-term pain that a Grexit would have on the markets.  Allowing Greece to leave the Eurozone would be very costly to Europe.  It could create a financial and economic crisis across Europe that is triggered by fear of a deeper fracture in the union.  Investors would immediately wonder if other troubled nations such as Portugal, Ireland and Spain would follow.  A Grexit could easily drive EUR/USD down 5%.  Yet apocalypse can be avoided.  We know that the overwhelmingly majority of people in Greece want to keep the euro and Tsipras says he wants to as well so if both sides budge just a little, an agreement can be reached. The next real opportunity for a deal is the EU Summit on June 25th.

Dollar Extends Losses Post FOMC

Investors continued to sell the U.S. dollar after the FOMC rate decision. The greenback traded lower against the euro, Japanese Yen, British pound and most other major currencies.  What is interesting about the move is that it runs counter to the rise in Treasury yields and stronger U.S. data. Consumer prices rose 0.4%, the largest gain in more than 2 years, jobless claims dropped to 267K from 279K, manufacturing activity in the Philadelphia region grew at its strongest pace this year and the leading index beat expectations.  All of these reports reinforce our view that the Fed will raise interest rates this year.  Investors had clearly expected more from Janet Yellen on Wednesday but the Fed's economic assessment was upbeat and 10 out of 15 FOMC officials see two to three rate hikes this year - you can't get more hawkish than that.  So as we indicated in yesterday's post FOMC note, the long dollar trade is not dead.  Investors hoped that Yellen would be more hawkish but at the end of the day the message from the dot plot forecast and her press conference is clear - rates will rise this year.  If labor data improves and inflation ticks higher, the Fed will even raise rates twice this year.  So in an environment where the RBA, RBNZ and ECB are either easing or talking about doing so, the dollar remains attractive.  USD/JPY in particular has found support above 122.50, the June low.  If this level is broken, there is also support at 122.

GBP: 9 Days Without a Correction

The British pound has now gone 9 days without a correction. This is the longest stretch of gains for GBP/USD since April 2012 when the currency pair rallied for 10 days straight before topping out. At the time, the "top" became a strong one that took GBP/USD from a high of 1.63 to a low of 1.5270 with not much in the way of a relief rally. This is not to say that history will be repeated because the recent gains in sterling have been supported by strong fundamentals.   Retail sales rose 0.2% in the month of May against expectations for a 0.1% decline.  Excluding autos spending also rose 0.2%. These numbers are in line with the rise in earnings and the BRC retail sales report.  For the Bank of England, this week's better than expected data hardens the case for an early 2016 rate hike. Public sector finances are scheduled for release tomorrow and unless there is a big change from the previous month, the impact on sterling should be nominal.  Technically, GBP/USD has already broken above the 2015 high of 1.5814.  It also cleared the 38.2% Fibonacci retracement of the 2009 to 2014 rally at 1.5800.  There is no resistance now until 1.60 and we believe that the currency pair is on its way to test this level.  However should GBP/USD sink below 1.5750, we could see a deeper correction down to 1.55.

USD/CAD Bounces Off Support Ahead of Retail Sales

There was zero consistency in the performance of the commodity currencies today.  The Australian dollar soared, the New Zealand dollar collapsed and the Canadian dollar was unchanged against the greenback. The divergence between AUD and NZD drove the AUD/NZD cross up 1.6% to its strongest level in 7 months. With no Australian data released overnight, the move was fueled primarily by higher gold and iron ore prices. We are a bit surprised by the strength of AUD especially considering that the RBA is threatening to ease.  As such we believe that somewhere between 79 and 80 cents represents a good level to sell AUD/USD.  NZD on the other hand is falling for the right reasons.  New Zealand's economy grew by only 0.2% in the first quarter, significantly weaker than the market's 0.6% forecast. This reinforces the RBNZ's decision to lower interest rates this month.  The Canadian dollar will be in focus for the next 24 hours with Canadian consumer prices and retail sales scheduled for release.  Given the rise in employment and uptick in the price component of IVEY PMI, we believe that tomorrow's reports will extend the gains for CAD.