Despite Optimism the EUR Is Lower: What Happened?

  • An eleventh hour breakthrough by Greece
  • Greek capital controls remain a reality
  • ECB offers daily lifeline through its ELA program
  • Yen losing its safe-haven mojo

It’s normal and prudent to find most investors preferring to deal with the facts while speculators, on the other hand, do just that; they speculate. Yesterday’s apparent breakthrough in Greek-European talks are either beautifully timed at the eleventh hour by the inexperienced Greek prime minister, or it is “forced” luck by a bunch of frustrated European officials.

Fact: there has been a calculated breakthrough in Greece’s talks with its creditors. Fact: both sides are short on details, but over the next two days a lot of work is required to be done, or so the market has been told. Nevertheless, it seems that both eurozone officials and the government in Athens are confident that the process could be finalized this week, thus avoiding potential Greek capital controls, a debt default, and a Grexit. For most investors, they prefer to see it in black and white, while speculators are making most of the market noise and adding risk again to their portfolios.

Greek Capital Controls Not Gone Away

In reality, the threat of capital controls remains ever present for Greece. Currently, the European Central Bank (ECB) continues to offer a daily lifeline to Greek financial institutions through its Emergency Liquidity Assistance (ELA) program. Earlier today, it was again necessary for the ECB to provide extra cash for the fourth time in seven days after another +€1.6 billion was withdrawn from the Greek banking system yesterday. On the flipside and when necessary, the Greek government should find it a tad easier to sell its proposals to its own supporters citing the constant threat of capital controls and flight of capital as a leverage.

So far this week, the speculator has been pricing in a lot of market optimism ahead of tomorrow’s Eurogroup meeting, pushing both equity prices and European sovereign yields higher. For the investor, the EUR’s move lower over the past 24 hours has been more puzzling than anything. Many expected a reduction in Greek risk would be a positive for the common currency. However, the single unit so far this week seems indifferent to the Greek talks.

For the speculator, the easing of tension between interested parties has allowed the taking on of more risk, pushing the USD to build upon recent gains against the majors and commodity-related pairs. The optimism on Greece is perhaps bringing the focus back on the Federal Reserve and its first potential rate hike. With rate divergence back on the table, it’s allowing many to reconsider re-entering one of the most popular traders of this year – short EUR/USD.

Single Unit Fails to Benefit from Stronger Data

The EUR outright is trading at a one-week low (€1.1235) and is unable to benefit from better data in the European session ahead of the U.S. open. Despite the eurozone economy appearing to rediscover its drive in June, the single unit seems content in cracking the psychological €1.1200 handle sooner rather than later.

Earlier this morning, European purchasing managers’ indexes (PMI) pointed to acceleration in the growth of the business activity. The composite PMI (a measure of services and manufacturing activity) rose to 54.1 from 53.6 in May. The highest monthly level printed in over two years. The details revealed that both the services and manufacturing sectors both picked up, although the new order component slowed for a third consecutive month. This may suggest, until Greece’s issues are resolved, it’s not going to get any better. Despite the rosier picture, an ongoing concern for the ECB will be the fact that businesses continue to cut their prices.

Asian PMIs Produce Mixed Results

Thankfully Europe has not cornered market volatility entirely. In China, Shanghai Composite trading resumed where it left off last week with another selloff in spite of equity strength being recorded nearly everywhere else.

Not helping were the mixed results from China’s June flash manufacturing PMI data. Despite the headline print remaining in contraction for a fourth consecutive month (49.6), the print was above consensus (49.4). Nevertheless, the devil is always in the details. The output component rose to 50.0. Both new orders and backlog components were also notably stronger, but perhaps most important, the employment conditions print deteriorated further.

Not wanting to go it alone, Japan’s preliminary manufacturing PMI slid back into marginal contraction (49.9), as production growth slowed and new order demand contract for the third time this year. Similar to China’s, Japan’s PMI employment component was also soft, even though Japan’s more favorable exchange rate (¥123.66) translated into an upbeat exports view.

The USD remains well supported against the yen at the moment for a number of reasons. The Bank of Japan’s (BoJ) monetary policies are still divergent, even if the timing of the Fed’s first rate hike remains vague. Currently, rising Japanese energy import costs are bearish for JPY as export volumes struggle. Finally, CHF and GBP has been sapping the yen of some traditional safe-haven Greek flows, and is allowing the recent surge in speculative yen shorts to support USD/JPY on pullbacks at the moment.

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Dean Popplewell

Dean Popplewell

Vice-President of Market Analysis at MarketPulse
Dean Popplewell has nearly two decades of experience trading currencies and fixed income instruments. He has a deep understanding of market fundamentals and the impact of global events on capital markets. He is respected among professional traders for his skilled analysis and career history as global head of trading for firms such as Scotia Capital and BMO Nesbitt Burns. Since joining OANDA in 2006, Dean has played an instrumental role in driving awareness of the forex market as an emerging asset class for retail investors, as well as providing expert counsel to a number of internal teams on how to best serve clients and industry stakeholders.
Dean Popplewell