Yesterday’s rout in the German bund market and the associated short squeeze in the euro have abated for the time being, allowing the greenback to claw back some of the losses witnessed yesterday in the aftermath of rumors an 11th-hour deal was in the works between Greece and its creditors. As it currently stands a deal must be struck within the next 48 hours or Greece will not be able to make its June 5th payment that is due to the IMF, and although both sides have drafted proposals, it still appears as if the Troika and Greece have a ways to come before both agreeing to a deal. Greek PM Alexis Tsipras will be meeting with European Commission President Juncker to discuss the offer Greece submitted on Monday evening, though the outcome will likely not be monumental as we suspect the proposal penned by the Troika will be the tender the Greek counteroffer stems from. It is unlikely the volatile conditions for the euro subside as we move into the latter half of the week, with the common-currency to take its cues from Greek headlines and the important US jobs report on Friday.
The nearing of the Greek endgame has taken some of the spotlight away from the ECB rate decision this morning, which as expected, decided to keep monetary policy unchanged. The interesting developments on the monetary policy landscape in Europe, if any, will unfold during Mario Draghi’s press conference, though we would expect the resulting question and answer period to reconfirm market expectations. The economic data from the common-currency zone has been improving as of late, with Composite PMI data for May coming in today better than expected, not to mention the optimistic progression of private sector loan growth, M3 money supply, and consumer prices. That being said, the external tailwinds that have helped bolster the recent string of stronger domestic data (lower euro, lower oil prices, lower interest rates) have partially reversed, so it is likely Draghi echoes caution as to the progress of the recovery and telegraphs that to speak of an early exit from QE would be premature. In addition, it is also likely that Draghi fields some questions over earlier statements from board member Coeure, and the logistics surrounding the front-loading and dynamic tapering of QE purchases given supply and demand factors. Given the recent volatility in the European fixed income market we would assume Draghi will reiterate the ECB’s commitment to a smooth and orderly downward trajectory of interest rates, hoping to calm market worries and reduce some of the nauseating volatility experienced of late. The euro has given back a portion of yesterday’s gains against the greenback, but is holding relatively stable as Draghi takes the podium ahead of the North American open.
As we get set for the opening bell in North America, a slew of economic data was released just moments ago, with the resulting effects contributing to the strong bid tone witnessed in the USD. The ADP employment report for the month of May showed that 201k private sector jobs had been created, just slightly above the median analyst estimate of 200k, but up sharply from the 165k registered in April. While nowhere near an exact correlation to the more important NFP number on Friday, the positive developments for the labour market and the likelihood Friday’s job report showcases another robust number has the big dollar on firmer footing. Helping traders and investors add exposure to the big dollar this morning was the fact that the trade deficit position for the US contracted more than expected for the month of April, posting only a $40.88bln deficit, a sharp narrowing from the surprisingly wide $50.57bln hole registered in March. The rebound for net exports is a positive highlight for second quarter growth numbers, and should the trade deficit manage to sustain this position throughout the quarter, sucking up the first quarter drag imposed by the sharp rise in imports should help the Fed get more comfortable with a rate increase later this year. North of the 49thparallel, the trade balance numbers for Canada disappointed to the downside, with the trade deficit shrinking by less than expected. March numbers were revised down to show a negative balance of $3.85bln, while the April number missed expectations for a deficit of $2.10bln and printed at $2.97bln. Slightly worrisome for Poloz and the BoC is that in April total exports declined by 0.7%, when excluding energy products exports fell by 2.0%; not the sort of “fire” in the non-energy export sector that Poloz had envisioned. The loonie has given up the majority of yesterday’s gains after the data dump this morning, with the USDCAD bull position galvanizing before Friday’s employment numbers.
Further reading:
USD flash crashes against majors – then recovers
Draghi does not really lift forecasts – EUR/USD wobbles and rises
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