Greece nears default
Overnight Japanese GDP data has surpassed expectations and given the Yen a small boost bringing USDJPY back towards the 125.00 level after it burst through last Friday on the back of the good nonfarm payroll figure. The number was so impressive that not only did the dollar head higher, but US treasury yields spiked, especially on the shorter dated two year, which at one stage hit its highest level for over four years. Before the figure expectations for the first rate hike were at the very back end of 2015 to beginning of 2016, but this has brought this in a little to around October, but one this id for certain, we won’t be seeing the first hike next week which only 6 months ago was the favourite to mark the commencement of tightening.
Greece remains a thorn in the side of not only the Eurozone, but now the US after President Obama made clear his concern at the G7 about the heightened chances of a Greek debt default. Since missing the deadline for their first IMF repayment of the month last Friday, this Friday’s €350m deadline is moribund now that as they now insist on making all four June repayments in one at the end of the month. This is looking increasingly unlikely to happen without the funds from the agreed bailout extension earlier in the year.
EUR: The End Of Complacency - Credit Agricole
EUR came off at the start of the new week after the talks between Greece and its creditors in Brussels were abandoned after only 45 minutes yesterday. The latest revised proposal by Athens fell well short of creditors' demands who insist on credible commitment to higher primary fiscal surplus achieved through unpopular measures like further pension and wage cuts.
Greek officials reiterated after the talks that Athens is willing to find a solution going into the all-important Eurogroup meeting on Thursday. Our central case is still for a compromise to be found most likely in the form of a partial bailout extension in exchange for the implementation of some of the reforms. This should help avoid imminent default ahead of the IMF loan repayment next week. It could still leave open the prospect for a potential referendum in Greece on the full reform package in July, however, and keep the risks for EUR on the downside.
Market uneasiness could grow ahead of the Eurogroup meeting and keep the downside pressure on EURUSD in place for now.
One key question is also how the Fed will respond to the intensifying uncertainty about Greece. We suspect that while Yellen will try not to rock the boat too much, it will be hard for her to ignore the latest improvement in US data and especially various inflation gauges. Positive surprises from today's US IP could fuel more hawkish expectations some more. All that should keep USD supported broadly this week.
Lingering Greek fears and more constructive message from the Fed could make for a less favourable backdrop for risk correlated G10 currencies. We suspect that the likes of AUD and NZD could remain vulnerable alongside EUR.
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