Weekly Market Review 1-7/06/2015

Will Draghi Make a Move?

This week, tensions in the Eurozone are not only set to continue but likely to escalate. On the agenda a combination of fears over a Greek default to the IMF and the ECB rate decision. Both raise important questions that could generate volatility swings in Euro pairs across the board, as well as European indices.

The Greek Saga

It sure seems like the Greek debt saga is, for investors at least, a story without end. The Greek government is due to pay €300M this week and it’s very likely that they will formally admit that they can’t afford it. Given the foregoing, the risks of a Greek bankruptcy are running fairly high. If, indeed, Greece misses that payment to the IMF, several things will happen. One, the Greek government will be cut off from the world banking system. Two, it could dramatically raise the likelihood of a Greek exit. And, three, it could push the Euro into a dramatic meltdown. With negotiations ongoing between Greece and Germany (Greece’s major creditor) investors will be on the edge of their proverbial seats. Investors don’t believe the Greek crisis will be resolved this week but they maintain hope that the Greek crisis won’t become a Greek tragedy. If a resolution is not reached it will have dire consequences for Greece and the Eurozone. Among them, it will force the ECB to decide whether or not to cut off Greece from the Euro money system.

All Rests on Draghi’s Shoulders

Of course, if the Greek saga is resolved before the ECB’s rate decision that will relieve some of the pressure from ECB President Mario Draghi. If the Greek crisis is not resolved, however, then Super Mario will be forced to make tough decisions which could open the door to a Greek exit. That would, of course, severely rattle the Eurozone and send the Euro into a tailspin. Even if the Greek payment to the IMF is settled before the ECB meeting, some major announcements are still expected from Draghi. Recently, ECB board member Benoit Coeur suggested that the ECB could inject more liquidity. ECB watchers expect Draghi to elaborate, and perhaps even discuss some technicalities of the additional liquidity injection.

Understand that even if the Greek crisis is settled, Draghi’s confirmation of additional liquidity could still put pressure on the Euro. There is one scenario, a somewhat complex scenario, which could allow the Euro to confidently rebound. That is a combination of a Greek solution, no additional liquidity from the ECB and an improvement in the Eurozone’s inflation numbers from last month.

Non-farm Back on Track?

As always with a week that ends with the US Non-farm payroll release, that figure will determine the tone for the FX market as well as Wall Street. The Fed has suggested that the first rate hike in many years is data dependent. That means dollar bulls have high hopes that non-farms will return to growth steadily above the 200K mark. That would sufficiently anchor inflation expectations and pin down a rate hike this year rather than next. If, indeed, the NFP reads north of 200K that will raise the likelihood of a Fed rate hike this year and will support dollar demand.

Down to Business

If Greece defaults on its debt to the IMF then, regardless of all else, dollar demand is likely to surge with fearful investors pouring into the security of the good old greenback. But an uneventful week in Europe, i.e. no Greek default, no signs of additional easing from Draghi and a stable inflation reading, could ease demand for the greenback. If, on top of that, the NFP undershoots the 200K mark, then dollar strength could come to an abrupt end.

On the Plate

RBA Rate Decision(Tuesday)- If the RBA will slash the benchmark rate once again or even hint there is a chance for another rate cut in the next meeting , the Aussie could consolidate lower.

Eurozone Core CPI(Tuesday)- If  the Eurozone Core CPI moves above 0.6% Year on Year , it could be positive for the Euro.

Australian GDP Growth(Wednesday)- If the RBA is less dovish than expected and the GDP growth figure beats estimates , the Aussie could regain lost ground.

ECB Rate Decision(Wednesday)- Probably the main event of the week. If Draghi announces more measures especially with regards to Greece, the Euro could plunge.

BoE Rate Decision(Thursday)– If the BoE will continue and voice concern over the UK’s inflationary outlook the Sterling could retreat lower.

Eurozone GDP growth(Friday)- If the Eurozone GDP release will beat expectations the Euro could gain ground. Of course this will be subjected to development in the Greek arena as well as the ECB meeting earlier in the week.

Nonfarm Payrolls(Friday)- The main event for the US dollar and Wall Street this week. If the NFP reading will rise above 200k it will support dollar demand. The extent to which the dollar could gain bullish momentum as a result, will depend on developments in the Eurozone earlier in the week.

Chart of the Week – USDCAD

chart USDCAD

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