Dollar Passions: Storm has been Postponed until Fall

The positive on consumer sector has become another confirmation of recovery in the 2nd quarter.
Last week was worked off under the sign of quite strong economic data from the USA, but diversified and not very active response speaks only about one thing - the market has grown tired of expectation and has little trust in dollar. Simply positive numbers are few, investors need clear signals on the perspective of rate increase. According to the statistics, serious declines occur with the periodicity of 6-7 years. The fall of this year is exactly the next point after the smashing crisis of 2008 - the very time for tightening the American credit and monetary policy. A global "pullback" and formation of the platform for further growth are needed. Previously, FRS actions during crises were quite cautious; however, regulation today is far off worse managing the appetites of speculators than the fear of global bankruptcy.

Inflation is becoming a global problem, and even if FRS does not print empty money for the financial system, that task will be easily handled by ECB and the Bank of Japan. India and China have already activated the policy of stimulation of consumer activity, which also increases the supply of money. During previous crises, the USA had space for a credit maneuver at the expense of existing high interest rates, and today it is not available. The market of housing credits has shown the only stable growth; however, it can quickly collapse in case of rate return to normal levels. Besides, present-day housing credits in the USA have been provided by various non-banking structures and not by traditionally cautious banks. And most Americans who have an opportunity to process a loan, do not buy houses but rather purchase nonessential products, for instance, cars or small businesses, which adds additional risk.

It feels that time is running out. Presently, statistics allows to hope for the recovery of consumer activity - that is what FRS needs for federal funds rate increase. The positive on consumer sector has become another confirmation of recovery in the 2nd quarter (besides growth in May, the April value was also revised towards increase). The main source of volatility this week will be FRS meeting on Wednesday, when there will be no real rate increase; however, in the midst of statistics flow, the demonstration of "technical" readiness for such a step in the current year is expected. Only Yellens' comments can hinder dollar purchases against this background; however, in any case, the time has come to have more clear wording with regard to dates.

Positive data are expected for all statistics of this week: inflation in May, industrial production and property market; improvements are also predicted with regard to business activity indexes of Federal Reserve Bank of New York and Philadelphia. So, dollar is expecting some storms. Tightening of policy is needed in order for the difference between the investments into the USA and other countries to provide significant overbalance towards the former. And the fear of expensive dollar is easily compensated by the stable fall of raw materials costs.

The Greek drama in Europe has been going on and tends to push even the FRS meeting to sidelines. The creditors' insistence is understandable: "special policy" is needed for Greece in order to repay at least a part of invested money. In actuality, only about 10% of loans of the salvation program have gone towards real financing of Greek expenses. Greece is trying to found its defenses on this fact; however, creditors tend not to see it. Sunday debates have not produced anything positive. Presently, there are no reference points for real decisions regarding Greece. Greek Minister of Finance Varoufakis, unlike Tsipras, believes that Greece's pull out of Eurozone is dangerous and inadmissible. His stubborn refusing revision of salaries and pensions and other "unachievable financial conditions" led to the situation when IMF called off its technical specialists from negotiations on Thursday, and the chances for a new tranche of 7.2 billion euros turned into an illusion. The next round of fight for Greece has been planned for June 18. However, one has the impression that euro has gained immunity to Greek problems - negotiations fail, but euro refuses to get cheaper. Most likely, large players know something that allows them not to be afraid of Greece's pull out of the EU. According to the CFTC data, many large and medium short positions in euro were closed last week, and as the result, the volume of open interest fell dramatically. We can see the reluctance to open new transactions.

Author: Navsher Bartash,
ForexChief Currency strategist