The euro dropped from the previous day’s highs, after it confounded predictions of a drop following the weekend’s dramatic events in Greece and instead managed to rise to as high as 1.1277. The euro was off about a cent from those highs at 1.1173 during the end of the Asian session. It is worth noting that Monday featured a huge range from 1.0950 to 1.1270.
In Greece itself, the domestic situation was becoming more difficult as bank closures and cash withdrawal restrictions were expected to begin to cause problems. Greece was heading towards the referendum on Sunday with a Greek exit from the Eurozone in the event of a ‘no’ vote, increasingly likely. Stock markets around the world posted sharp drops on Monday because of the negative developments from the Greek debt crisis. Some analysts said that Greece was the catalyst for the correction rather than an underlying cause at this stage. Chinese shares rebounded after the big drops of the previous sessions and the Nikkei 225 was also higher.
The euro was also on a roller coaster ride versus the Japanese yen, trading from 133.75 to 138.11 on Monday. It was last at 136.71. Japanese data was slightly on the disappointing side, as housing starts for May missed expectations and wage earnings for the same month were up 0.6% year-on-year versus 0.7% expected. The yen was doing well versus the US dollar as it traded at 122.38.
There were competing theories as to the euro’s resilience in the face of such negative news out of Greece. One was that the Swiss National Bank had bolstered the euro by intervening in the market by selling francs and buying euros. The SNB though is unlikely to have used such firepower as to move the euro so much. A second more plausible explanation was that the euro had partly replaced the yen as the funding currency of choice for leveraged risk asset purchases such as stocks. When leveraged purchases of stocks go bad though, there needs to be liquidation and repayment of loans, which translates into euro purchases. Thirdly, the stronger euro may reflect some repatriation of foreign exchange reserve holdings by Eurozone financial institutions in order to boost their domestic liquidity ahead a possible Grexit. In any case, the essence is that euro/dollar has returned within its previous well-established range awaiting developments before it attempts a decisive breakout.
Looking ahead to the remainder of the day, Eurozone flash inflation for June will attract a lot of attention. Headline inflation is expected to dip to 0.2% year-on-year from 0.3% in May, while core inflation is also expected to dip to 0.8% from 0.9%. Eurozone unemployment for May is also expected to come out at 11.1% – steady versus the previous month’s rate. In the United States, consumer confidence and Case-Shiller Home prices will be watched. End-of-month trades and position adjustments could add to volatility.