By Dean Popplewell
As long as the Greek populace wants the euro there will be an eventual compromise, but until then, Grexit threats, rumors and innuendo will provide enough fodder for capital markets to deliver heightened volatility across all asset classes. Already this morning, Greek Prime Minister Alexis Tsipras has had another proposal shot down as it was seen as another “vague rehash” of earlier plans. However, the reality is that Greece does have its back against the wall. The country has about a week (including a parliamentary vote if needed) to offer up sufficient reforms or further commitments in return for kicking the infamous ‘can’ down the road.
If nothing else, the EUR’s (€1.1275) price moves since Friday’s nonfarm payrolls (NFP) report has been keeping market participants busy. The single currency has come under intense pressure from its intraday highs (€1.1347) and is again testing support well below the psychological €1.1300 handle. Yet the moves from German bund yields continue to make life rather difficult for the EUR bear. The market appears to be ignoring stronger fundamentals as a large percentage of the EUR’s moves remain blurred by Greek rhetoric and the backup in sovereign yields.
Bund Yields Play Havoc With EUR Prices
The German 10-year bund is trading atop of intraday price lows, and yield highs (0.86%) led the way down again by long-end trading due to supply (10’s and 30’s steepening +1.5 basis points). This is reminiscent of the single currency price moves a couple of weeks ago. It’s no wonder that the European Central Bank (ECB) remains concerned about liquidity and market volatility. Every time EUR bears think they have now established a winning position, sovereign yields muddy the waters. It seems that investors are nervous about bottom fishing. In recent weeks, when they reach out to own product, they seem to be immediately offside. Because of market duration, the risk-reward to investors still favors weaker bunds (technical analysts are looking for 10-year bunds to penetrate resistance at +1%) and a steeper yield curve. With German debt underperforming its U.S. Treasury counterpart, tighter U.S.-German spreads will favor the single currency for the time being, at least until investors can get a better handle on the U.S. consumer from Thursday’s retail sales numbers.
Currently, the market continues to ignore stronger fundamentals. Last Friday’s NFP should have had more of a lasting impact regardless as to whether or not U.S. officials are concerned about the dollar’s strength. For Europe, the most significant data today is the eurozone’s revised first-quarter gross domestic product (GDP). As expected, the headline print is unrevised (+0.4%, quarter-over-quarter) and thus far has had a minimal impact on the single currency’s price moves.
Euro GDP Supported by Oil Prices and Inflation
The eurozone breakdown of first-quarter GDP confirmed that the slight pickup in growth seen in the first three months of this year was driven by strong domestic demand. That demand was likely fueled by the positive effects of lower energy prices and euro inflation.
European policymakers will be happy to see a solid rise in household spending (+0.5%, the strongest gain in nearly six years), and an even stronger +0.8% rise in investment. However, net trade, despite the weakening EUR, remains a drag on growth. Regional exports slowed to +0.6% and were outpaced by the +1.2% gain in imports. This may suggest that the eurozone economy has benefited little from a weakening domestic currency, even with the ECB’s quantitative easing program doing the bulk of the currency price damage. Nevertheless, the drag on growth has been partially offset by regional government investments (+0.6%), which could indicate that the eurozone is finally moving away from austerity measures.
But it isn’t all wine and roses for the eurozone’s policymakers. No doubt they remain concerned by the second-quarter pickup in crude prices and inflation. Both factors could weigh on consumption and investment, as could the seemingly unending drama with Greece. Put simply, Greece remains the unknown variable when it comes to consumer confidence.
The bulk of the EUR price damage so far this morning is not USD driven. Yen on the crosses is having the biggest impact on the single currency (€139.72) just as the market heads stateside. Ever since yesterday’s surprise Japanese growth numbers, the yen is pushing USD/JPY to make a compelling run toward the sub-¥124 handle. The pair is some -160 pips lower than the high reached after the NFP data.