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    IronFX Daily Commentary | 17/07/15

    17.07.2015, 10am

    The fickle market Just last week the market was fixated on Greece, Greece and Greece. Now the country is nearly forgotten and it’s back to looking at monetary policy divergence. The Greek parliament passed the laws necessary to get a bailout, but the relief rally in EUR barely lasted. On the other hand, the DAX is up about 10% from its lows and Spanish 10-year bond yields are back below 2%, where they were at the beginning of June. So just as before, other financial assets are reflecting Greek developments more than the FX market is.

    Monetary policy divergence The old theme of monetary policy divergence got a boost yesterday as both Fed Chair Yellen and ECB President Dragi spoke. As I mentioned yesterday, Yellen has been reminding everyone that the Fed wants to hike rates this year, data permitting. Draghi on the other hand reiterated the ECB’s willingness to use “all the instruments available” to counter any tightening of monetary policy or further decline in inflation. This divergence is once again driving USD strength/EUR weakness.

    GBP also benefitting The other currency benefitting from this monetary policy divergence theme is GBP. Bank of England Gov. Carney made a speech yesterday in which he stated the Bank’s determination to raise rates within the next three years. The market is discounting that they start hiking next February, which would be more or less in line with Carney’s comment yesterday that “(t)he decision as to when to start such a process of adjustment will likely come into sharper relief around the turn of this year.” This is a very different tone from most other central banks, which are still talking about the need to safeguard recovery and prevent inflation from falling too low. EUR/GBP fell below 0.70 for the first time since 2007 (see technical comment).

    Commodity currencies to suffer On the other hand, countries that rely on commodity production are likely to see lower economic activity and hence lower inflation as Chinese growth slows. That could cause them to cut rates, as Canada did this week (and as New Zealand may do next week) and put downward pressure on their currencies. Oil prices fell further yesterday as investors wait for Iranian oil to hit the market. Watch out for CAD and NOK. AUD on the other hand rose steadily throughout the European and US day yesterday and maintained much of those gains today. The reason wasn’t clear.

    Draghi reaches out to Greece Getting back to ECB President Draghi, yesterday he surprised the markets by increasing the Emergency Liquidity Assistance (ELA) funds to Greek banks by EUR 900mn and suggesting that the ECB might start including Greek government bonds in its QE purchases. I think it was generally assumed he wouldn’t boost the ECB’s aid to Greece until the country had made the large payment to the ECB due on 20 July. However, he apparently thinks that so long as the Eurozone finance ministers have agreed to keep Greece in the Eurozone, he is obliged to do “whatever it takes” to ensure that the country can indeed remain in it. His actions will reduce tensions in the Eurozone. In that respect, his aid to Greece may be negative for the euro, in that a solution to the Greek problem makes it easier for the Fed to hike interest rates. Indeed, the moves to solve the Greek problem – the Greek parliamentary approval of the bailout conditions, bridge loan agreement to ensure repayment to the ECB, and the increase in ELA – may well explain why Fed funds rate expectations were up around 4.5 bps yesterday despite mixed US economic data (a big decline in initial jobless claims and a rise in the NAHB housing market index, but a disappointing fall in the Phili Fed index).

    Today’s highlights: On Friday, we have a relatively light calendar. There are no major economic indicators scheduled during the European session. Germany will vote on the Greek bailout; that might give rise to some stirring speeches but at the end of the day I expect they’ll pass it.

    • In the US, we get the headline and core CPI rates for June. The headline figure is expected to rise after an unchanged reading in May, while the core rate is forecast to have accelerated to +1.8% yoy from +1.7% yoy. A rise in the CPI rate is likely to keep USD supported as this would add to the positive data from the country and increase the likelihood of a rate hike. A Cleveland Fed research paper yesterday said that “(t)he recent pickup in three-month inflation rates suggests the possibility—admittedly, not very likely, with just a few months of data—that trend inflation rates have bottomed out and begun to move back toward rates consistent with the FOMC’s 2-pct objective for PCE inflation."

    • The preliminary U of M consumer sentiment index for July is also coming out along with the surveys of 1-year and 5-to-10 year inflation expectations. Housing starts and building permits for June are also to be released. Housing starts are forecast to increase a bit, while building permits, the more forward-looking of the two indicators, are forecast to moderate somewhat. Nevertheless, the overall strength in the housing sector supports the view that growth in Q2 could rebound somewhat and this could strengthen the greenback a bit.

    • We get the June CPI data from Canada as well. Following the interest rate cut by the BoC on Wednesday, any CAD strengthening from a positive CPI data could be limited.

    • As for the speakers, Fed Vice Chairman Stanley Fischer speaks.


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