Positive EUR sentiment on Greece optimism providing broad boost to risk.
Heavy data calendar today; while USD will trade on ISM, ADP, headlines will be more important for EUR.
FX markets continue to trade along two opposing major themes, the Greek debt crisis and the recently weaker US data – which continued overnight with much weaker Chicago PMI and Dallas Fed readings. But the tide is turning in favour of increased risk appetite as signs emerge of another bailout package in the pipeline. After reports earlier in the week that Germany was backtracking on its previous insistence that private creditors bear some of the cost of new assistance, a report in the Greek press says that a new deal with the troika is imminent – perhaps as early as tomorrow morning. While we have favoured EUR higher on a deal on another another package – perhaps with some token ‘voluntary’ lengthening of maturities but not significant enough to really damage private investors – our concern was that EUR might come under renewed pressure in the gap between a negative troika report and any eventual agreement. But this report suggests they are moving quicker than expected towards an agreement: if they are ready to announce at least the outlines of new package at the same time as the report is released then the anticipated EUR dip might not materialise.
It would be surprising if there were not a few bumps along the road before an eventual agreement. Any proposed deal is likely to run into opposition not only from within Greece, but also from creditor countries; and perhaps even from some of the smaller EU countries uncomfortable with the implications for sovereignty of EU involvement in internal Greek affairs. So there’s plenty of room for volatility between now and any approval of a final package at the 20/24 June European meetings. But ultimately we see a rebound in risk as fears of Greek upheaval subside, suggesting a return towards the highs above 1.49 by month-end. In the meantime, EURUSD is bid today but may struggle to break the 1.4500 level unless more supportive more details emerge.
Amid incoming ECB rhetoric that appears to leave the ECB still minded to lift rates again no later than July, today?s Eurozone PMI ?flash? will be important. If it holds at April?s 54.8 level (consensus) this will do positive euro sentiment no harm whatsoever. If at the same time the UK manufacturing PMI falls from its 54.6 April reading (consensus 54.1, BNPP 53.0) then this will ensure EURGBP continue to match gains in EURGBP. With the cross having closed above 0.8745 Tuesday, the upside to at least 0.8800 looks clear on a soft PMI read.
Australian Q1 GDP came in slightly below the consensus for a 1.1% QoQ contraction, but given the poor GDP components earlier in the week, the result was better than the market feared. With the Chinese manufacturing PMI also coming in relatively strong, AUD has rebounded strongly; it still has some catch-up to do and a break of 1.0750 would open the way for a more significant move towards the 1.0875 level. USDJPY remains hemmed in beneath ichimoku cloud resistance circa 0.8270 while risk of a fresh fall in US yields pulling the pair back down towards 80 is ever-present. What the day’s key US releases, ADP employment and manufacturing ISM, do for US yields today will therefore be crucial. We should note though that if ADP comes in close to consensus near 175k and ISM near 57.0 from 60.4, these will still both be quite decent outcomes and likely not enough to see 10yr Treasuries test 3% – which looks to be a prerequisite for a test of Y80. In the meantime if risk appetite holds in, Yen crosses can continue to push higher.
BNP Paribas
Corporate & Investment Banking