Dollar puts everything on the defensive
Waking up this morning in a blustery, wet London, we have to wonder if the brief warmth of the weekend was the British summer for 2016. Certainly, the sun is no longer shining on currency markets, with risky assets as well as oil and commodity currencies very much in a defensive crouch.
The overnight winner has been the US dollar, albeit with little fanfare and on the back of no real data. Some are reporting that a change in sentiment on emerging market assets has been seen in the past week or so, and positions that once saw investors selling the USD are being reversed quickly. Certainly that would explain the strength of the greenback against the yen in recent sessions.
China still seeing money leave via the back door
News from China of disappointing trade numbers alongside continued outflows from the Chinese economy had little effect in European markets. Chinese inflation remained elevated, but it is our belief that this will come lower through the 2nd half of the year as oil price declines weaken base effects. Certainly, additional stimulus from the People’s Bank of China is not going to be ruled out by these numbers.
Evidence of further outflows from the Chinese economy into Hong Kong have seen CNY/CNH rally to its highest level in over a month overnight. Onshore money wants to get offshore, and liquidity concerns will only increase in this environment.
Bank of England could give sterling a backbone
Sterling held up well yesterday despite impassioned speeches from Cameron and Boris Johnson on their respective sides of the referendum argument. An ICM poll showing a 2pt lead for the Leave campaign was also not taken up by the sterling bears, and leaves many crosses – GBP/USD and GBP/EUR in particular – in a bit of a No Man’s Land before Thursday’s Quarterly Inflation Report.
As we pointed out in yesterday’s Weekly Update, apart from the risk of a Vlieghe vote for a cut in interest rates, we have to maintain a bullish sterling stance into the report on the basis of likely higher inflation expectations through 2017/18.
Greece to see debt relief?
The rumblings of the Greek situation are getting louder with an extraordinary EU meeting of Finance Ministers yesterday. Greece is due to pay back EUR3.5bn of debt in July, but will be unable to unless further funds are leant or debt forgiveness is put into place.
Yesterday saw the greatest opponents of debt relief, Germany, hint that they were open to the possibility of debt relief and an agreement will be sought. It will come as no surprise that the stick that accompanies this carrot is to enact long needed further pension and spending reforms.
I believe that any debt relief coming Greece’s way would only be limited to tinkering with maturity (paying back debts over a longer time frame), rate cuts (paying less interest) and coupon deferrals (paying back the interest later as well).
A haircut would represent a very hot political potato and forms a dangerous precedent; it will meet considerable political opposition in Europe however, within the Bundesbank in particular. Either way, we are through the looking glass on Greece at the moment; it is not so much Alice in Wonderland as ‘Alexis in Weidman-land’. We’ll have to wait and see if anyone loses their head.
The Day Ahead
The data calendar is as soggy as a London newspaper today, although the UK trade balance numbers at 09.30 have the potential to increase fears of a widening current account deficit ahead of the referendum.