Expecting the USD to continue to appreciate against other major currencies

Yesterday’s market action

This truncated week began with a sharp sell-off in equities, sparked by several developments over the long weekend. Firstly, the incumbent political party in Spain lost significant ground over the weekend to the far left as Podemos and Ciudadanos saw an impressive gain in support throughout Spain's urban centres. As discussed yesterday, events in Greece and how the euro area ‘partners’ deal with a left-wing government in the periphery will have significant implications for politics in the region and the ability of other extremist political parties in the likes of Spain and Italy to galvanise support and further broaden divide between the hawkish northern European countries and their southern counterparts in the monetary union. Secondly, there remains real discontent within the Syriza party over how to proceed with the negotiations with the IMF and the European Council, the implications of which will have profound impact on the future of the country. Tsipras and his cabinet, since taking office, have disappointed many left-wing hardliners within the party, who feel they have deviated from their tough pre-election stance regarding the nation’s debt levels and economic reforms. Greece, quite simply, is the test case for the euro project and the stakes are high for both sides, reflecting the protracted negotiations in recent days. The markets, largely used to Greek headline risk, took flight this time, with US and European equities closing firmly in the red and the euro driven lower to the 1.09 handle versus the dollar.

Today’s View

Today’s calendar is on the light side, the ‘famine following the feast’ of yesterday with US Durable Goods, Services PMI and New Home Sales broadly stronger than anticipated, a rare ‘beat’ and evidence that perhaps the world’s largest economy is shaking off its Q1 slump. With Greece risk front and centre in investors’ minds and yesterday’s stronger US data, expect the dollar to continue to appreciate against other major currencies. We also favour further downside in equities and crude ahead of tonight’s API inventories release after the US close.