GBP/EUR 1.4124 (0.7078)
It’s extremely difficult to get away from the Greek story which continues to dominate much of the market attention, simmering in the background however is potentially a far larger issue. Chinese stock markets have wiped nearly 30% off their value from the middle of June, the economy continues to underperform while GDP and demand both continue to fall as Beijing is taking steps to try and revive investor appetite. Stocks faced further selling pressure overnight after the Chinese Premier failed to address the ever growing crisis in a statement on the economy, this is one to watch, while a Chinese hard landing has long been speculated about, evidence of a greater slowdown is beginning to mount, only Greece keeps it out of the limelight. Needless to say the fallout from the Greek “No” vote had a negative impact on investor appetite across the globe, European and US shares both closed lower on the day, although US equities were somewhat more stable. The EUR was also lower across the board on the day but did manage to recoup a good bit of its opening declines through the day.
There is little new on the Greek story, voters have vetoed further austerity putting the Greeks membership of the Eurozone under serious doubt, the antagonist that was finance minister Varoufakis has now stepped aside, his resignation resulting in some positivity a deal could potentially be done, with EU leaders offering Greek leaders one more opportunity to come up with fresh reforms (once again). EU leaders will meet today in an emergency meeting, the ECB has continued to provide ELA ( Emergency liquidity Assistance) to Greek banks, however they have increased haircuts on acceptable collateral with the facility expected to expire by July 20th. The lack of a major sell off in the euro is interesting, but the lack of volatility and volume in yesterday’s trading is evidence of thin summer trading conditions and a market that really does not know what way to position itself for a Greek reactions as for now, the end result is still up in the air.
Many have been speculating about the recent strength of the EUR, despite the ongoing Greek situation. An interesting note crossed my desk yesterday suggesting that potentially some of the recent EUR strength has come from the liquidation of EUR carry trades funding Chinese equity positions. In short cheap financing is achieved in EUR, EUR sold to buy Chinese equities, however the huge sell off in Chinese equity markets has seen investors looking to reverse the initial trade resulting in EUR demand. Aside from Greece, there still remains downside potential for the EUR, particularly against USD and GBP as ECB policy diverges from the BOE and FOMC as they continue on the path to hike rates vs long term loose monetary policy from the ECB.
GBP has been maintaining strength, while we have seen some consolidation against the USD over the last couple of weeks, we did see it drive the Euro to fresh lows last week, levels not seen since November 2007, and any further signs of continued expansion in the UK economy may well help GBP continue its recent dominance. Industrial and manufacturing production from the UK headlines today’s calendar, with 1.6% and 1.8% growth expected respectively through May. While later in the day the NIESR GDP estimate also carries potential to support GDP if .5% or above. GBPUSD is supported just below 1.5530, a break below here can open up a move back towards firmer support towards 1.5200. Any move to the topside will likely be held by 1.5660 area. EURGBP will be looking back towards last week sub .7000 lows with any move higher likely constrained by EURGBP selling interest around .7200.
The USD has been benefiting from some safe haven demand following the Greek election fallout, the USD index is trading back towards June highs despite some weaker manufacturing from the US yesterday. Trade balance data headlines the US calendar this evening but tomorrow’s FOMC June meeting minutes will likely carry greater importance to USD direction. We still feel focus should remain on the data, in our view US data continues to be mixed and as such September rates hikes appear unlikely at this juncture. The Greenback appears happy to pick up demand slack however, especially as EUR, AUD and other EM currencies are less than appealing in current, risk adverse conditions.