IronFX Daily Commentary | 22/04/15

Greek problems continue to pressure EUR The Greek drama continues. Now the talk is that the ECB is getting worried about the solvency of the Greek banks, as I mentioned yesterday, and may increase the collateral haircut for the banks. The total collateral that Greek banks have submitted in order to get Emergency Liquidity Assistance (ELA) from the ECB is estimated at around EUR 140bn. The total ELA financing is estimated at EUR 74bn, so this implies a haircut of around 50% already. Assuming they raise this to 75%, it would mean the Greek banks need another EUR 35bn in collateral. It’s unclear (to me at least) if they have this much extra collateral available. Some sources say that they can. Without it, it’s also unclear to me how they would deal with any further withdrawals of funds from the banking system. Bloomberg reported that the Bank of Greece keeps a buffer of some EUR 3bn in ELA funds in reserve, but with Greek residents pulling around EUR 8bn a month out of the banking system, that wouldn’t last for long. Greek PM Tsipras will meet with German Chancellor Merkel Thursday in Brussels in an effort to secure a statement of political support from Berlin. Good luck!

As the Greek endgame approaches, it is clearly weighing on the currency. EUR/USD recently has been hitting its daily lows during London trading hours and then hitting its daily high during US trading hours, as the market in Europe reacts to headlines about Greece and then US traders play the daily range.

Negative EUR rates The 3-month EURIBOR rate went negative for the first time yesterday, meaning banks are paying each other to take money off their hands. Paying another bank -0.01% is better than paying the ECB -0.2%, I guess. The EURIBOR futures see it remaining below zero until after the ECB’s QE operation ends in Sep. 2016. US rates on the other hand are seen increasing steadily. This monetary policy divergence is what’s driving the market and will continue to drive it, in my view.

Oil falls; look for weak CAD, NOK today Saudi Arabia ended its bombing in Yemen, which reduces tensions in the Middle East slightly, while the API reportedly said crude oil inventories rose 5.5mn barrels last week. Oil market participants expect today’s US government data on US crude oil inventories to show a rise of 3.2mn barrels. The combination sent oil prices sharply lower, particularly Brent. This is likely to weaken CAD and NOK today. Note though that Saudi Arabia also ordered the national guard to take part in the Yemen operation, so it clearly isn’t over – only the part that was attracting international criticism.

Australia inflation sends AUD/USD higher What’s Australia’s inflation rate? Do you want the CPI? The weighted median rate? The trimmed mean rate? The seasonally adjusted rate? Quarter-on-quarter change? Year-on-year change? With four different measures, each of which is released in two different ways, it’s hard to tell exactly what the market was looking at. Some measures were lower than expected and some showed a decline from the previous quarter, while others were higher than expected or showed an acceleration. From my point of view, the headline CPI, which is what the Reserve Bank of Australia targets, fell to 1.3% yoy from 1.7% yoy. This is way below the RBA’s target of 2%-3% and therefore should increase the likelihood of an easing. But the weighted median measure accelerated on both a qoq and yoy pace, and that must have been what caught the market’s eye, because AUD/USD popped about 40 pips on the news, in contrast to the lack of any major move on Monday when New Zealand CPI came out lower than expected. The market now places a 59% likelihood of a rate cut at the next meeting on May 5th, down from 68% yesterday. RBA Gov. Stevens Monday reminded us that further policy easing is “on the table,” so I would not dismiss the possibility entirely.

Today’s highlights: During the European day, the Bank of England releases the minutes of its latest policy meeting. It will be interesting to see if other MPC members besides the previously hawkish MPC member Ian McCafferty worry about the possible impact of the low inflation outlook on wage deals. In such an event, rate hike expectations could be pushed further back and GBP could weaken.

In the US, FHFA housing price index for February and existing home sales for March are due to be released. The housing starts and building permits released last week were consistent with a firming housing market. If the existing home sales are in line with a strong housing sector, this may be USD-supportive.

We have no speakers on Wednesday’s agenda.