Dollar Bid As Greek Deal Remains Elusive

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Market Drivers May 11, 2015

PBOC cuts rates for third time in six months
Kiwi weighed on speculation that rate cuts are coming
Nikkei 1.25% Europe -0.77%
Oil $59/bbl
Gold $1184/oz.

Europe and Asia:
NZD Credit Cars Spending -0.7% vs. 0.5%
AUD NAB Business Confidence 3 vs. 3

North America:
GBP BoE Rate Decision 7:00

The dollar was bid on the first trading day of the week, basking in the afterglow of another decent NFP report on Friday while the euro remained under pressure as EU rescue deal with Greece remained elusive.

The greenback gapped open higher in Asian trade and held on to most of its gains throughout the morning European dealing as forex traders once again assessed the prospects of a Fed rate hike in September following Friday’s NFP report which showed that US economy gained another 225K jobs in April.

Meanwhile the euro was pressured dropping to a low of 1.1132 before finding some buyers as traders remained skittish about the Eurogroup negotiations with Greece. Although some progress has been made, no concrete deal has emerged. Tomorrow Greece must make another significant payment of 767 Million euros to the IMF and although the consensus view is that Athens will be able to scrape together enough funds to make the deadline time is clearly running out. An unidentified Greek minister was quoted as saying that, “we have enough money to pay the IMF this week but not enough to get through to the end of the month. We all know that.”

Some Greek politicians are now openly talking about the prospect of default. Costas Lapavitzas, a Syriza MP and member of the party’s standing committee said, “There is no point raiding pension funds to buy time. We just exhaust ourselves for no purpose.”

With both parties seemingly hardened in their positions the crisis with Greece appears to escalating rather than easing. The markets remain relatively sanguine about the situation, perhaps conditioned by the past negotiations which always produced a last minute deal. However with time running out and resources scarce, Greece may pushed beyond the brink of default and it is not at all clear how the actual reality of such an event could impact the euro going forward.

Meanwhile elsewhere, the weakest major currency against the buck was actually the kiwi which dropped more than a penny from its Friday close on speculation that RBNZ was ready to cut rates not once but twice over the next few months. With the highest yield in the industrialized world the New Zealand dollar remains the darling of the carry trade crowd, but its allure will quickly disappear if the notoriously hawkish RBNZ decides to ease its grip on the country’s monetary policy.

The latest string of disappointing macro data in combination with persistently lower dairy auction prices has convinced many analysts that the RBNZ will change course as soon as June and begin slicing it 3.5% benchmark rate in 25bp increments. If that scenario develops as expected, the selloff in the kiwi is just beginning and the pair could drift to test its lows at .7200 over the course of the next few weeks.

Boris Schlossberg
Managing Director

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