Greek Cash-Crunch Intensifies

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The optimistic investor sentiment that was witnessed yesterday in financial markets is set to continue for the second day in a row, with S&P equity futures firmly higher ahead of the opening bell in North America.  The equity rally observed yesterday took place despite New York Fed President Bill Dudley reaffirming the FOMC holds a tightening bias, and that the weakness in Q1 was transitory as opposed to larger structural issues.  Expecting a rebound in growth over the second quarter, Dudley foresees an opportunity to begin the rate tightening cycle later this year, though the New York Fed President continued to acknowledge this decision would be one that is data dependent.  The greenback has managed to build on yesterday’s gains, though the DXY remains well within recent ranges that have contained trading in the USD-linked basket.

One of the factors helping to generate a bid tone in the DXY is the softness in the euro, with negative Greek headlines and a mixed German ZEW survey weighing on the common-currency.  The survey from the ZEW Centre showed that the current economic situation in Germany surprised to the upside, coming in with a reading of 70.2 versus expectations of a 56.0 print, a result of negative yields on German debt and robust equity performance leaving participants feeling quite content.  The downside from the report was that the expectations side of the survey came in below the median analyst estimate, with economic sentiment falling to 53.3 from the 54.8 witnessed in March, as a weak Q1 on a global basis is offsetting the positive effects a lower euro is having on Germany’s export sector.

The weaker than anticipated economic sentiment portion of the ZEW survey is not solely to blame for the lagging performance of the euro, as reports that the ECB is looking for ways to rein in Greek bank’s access to the Emergency Liquidity Assistance program, along with the fact that the Greek government has imposed soft capital controls, has also made it difficult for the common-currency to find any sort of momentum.  The evaporation of liquidity in Greece is raising concern there may not be a smooth ending to the Greek saga, as witnessed by the introduction of measures obliging local governments’ across the country to transfer idle cash reserves to the Greek central bank.  The scramble for cash in order to stay afloat and meet its short-term financing obligations has Greek bonds tumbling to fresh record lows, while the euro flirts with giving up the 1.07 against the greenback.

As we get set for the North American open, the risk-on atmosphere is helping oil remain stable despite the bid tone in the big dollar, with the front-month WTI contract holding in the mid-$56 range.  Yesterday’s comments from Bank of Canada Governor Stephen Poloz have helped the loonie keep a lid on a retracement of last week’s gains, reiterating that January’s “insurance” has proven sufficient  for the time being, and with oil prices stabilizing, market participants are reining in expectations another rate cut is on the horizon.  On the economic data front, wholesale sales were released earlier this morning, and posted their second straight monthly decline coming in with a negative 0.4% growth rate over the month of February.  Today’s weak number follows the 2.9% decline witnessed in January, and given the soft manufacturing sales numbers last week, calls into question whether the retail sales print from last Friday is a legitimate rebound, or an aberration that is unlikely to underpin a resurgence in consumer spending.   The loonie has remained fairly stable against the greenback since the release of the numbers, with USDCAD changing hands in the low 1.22s.

Further reading:

A Greek default within the zone – the worst for EUR – SocGen

AUD/NZD grinding towards party – 40 pips to go

Get the 5 most predictable currency pairs

About Author

Scott Smith is a Senior Corporate Foreign Exchange Trader with Cambridge Mercantile Group and has a diverse background in the foreign exchange industry, with previous experience in both credit and trading related functions. Scott holds a Bachelor of Commerce degree from the University of Victoria, has completed all three levels of the Chartered Financial Analyst designation, and is currently working towards the Derivative Market Specialist certification offered through the Canadian Securities Institute. Cambridge Mercantile Group.

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