Europe in a New Search of Positive

Greece has actually been able to repay the new IMF tranche; however, it has used its reserves on the IMF account, which it must, by all means, replenish in the nearest week.
Draghi's speech along with quite honest comments on the present situation, traditional Greek problems, and negative American statistics can be considered as the main tone of the last week. The main keynote of the ECB President's speech was inflation as the "remedy" for all economic maladies. The so called HICP consensus forecast for 2014 (1.4) has not been reached; however, 1.8 expects ECB in 2016-2017, and 1.9 - in 2018. Today, it must be seen as a very favorable forecast. Banking competition has been growing, income has been declining, and net demand for loans has been growing. However: banks are planning to look for another level of borrowers on the terms of decreasing credit standards - the USA has made this type of mistake, and now, does Europe want to have the same problems? Hardly enough. Most likely, Draghi is trying to find alternative ways out from this situation and says what everyone wants to hear.

Greece has actually been able to repay the new IMF tranche; however, it has used its reserves on the IMF account, which it must, by all means, replenish in the nearest week. ECB has been able to overcome the resistance of several EU members and increased the financing of Greek banks by 1.1 bln leaving pledge requirements for ELA line without any changes. Weidman, being an evident opponent of such sponsorship openly called this step as a violation of ECB mandate. Taking into consideration that the decision of the European Court with regard to Bundesbank's suit against ECB is expected on June 16, Draghi has to make many efforts in order to bring the financing of Greece in line with the requirements of the charter. That is why, in case of the absence of an agreement regarding Greece till this May, ECB will be forced to tighten the terms of financing of Greek banks, which will trigger another drop-down of euro. Greece has been a factual bankrupt for quite a while; however, it is especially relevant for now to recognize this status officially because of the new government's irrational approach to negotiations. The country is not ready again to make the payments of 1.5 bln within the first two weeks of June and over 11 bln within three months. The attempts to use the available funds of local budgets by the central government have encountered open obstruction by local authorities. Besides, Greece has begun to curtail some of its social reforms performed in the previous years in the framework of obtaining European aid, in particular, in the area of creation of jobs and restructuring social payments. The demands to make payments encounter Cipras' "white noise" with regard to restructuring, for which the Greek government does not want to do anything. IMF document as of May 14 contains just concerns of the repetition of previous restructurings that ended with banal writing-off a huge part of the debt owed to private creditors. Neither IMF nor ECB is ready to assume additional risks of extension of debt repayment term, on which Greece strongly insists. Presently, Eurogroup officials have only reached an agreement with Greece regarding VAT, primary budget surplus, and privatization. The program for reforming the pension system, under which it would be possible to obtain a new aid tranche in parts has not been prepared. In the framework of the "Eastern partnership" summit, which is planned for May 21-22, a bankers' symposium similar to the American "Jackson Hole" will be conducted. This meeting is Cipras' last chance to receive German support. However, if there is no sufficient progress in negotiations regarding Greece today or tomorrow, an intermediate ECB meeting may be convened (May 20-21) for tightening pledge requirements for liquidity provision to ELA line.

April FOMC protocol expected on Wednesday will hardly have anything new. The battles during the last meeting were quite real; therefore, the market may receive the text as the final solution. Judging by the last comments, the threshold for the first rate increase will be quite low. The following points should be paid special attention to in the text of the Protocol:

  1. How FRS describes the conditions necessary to begin rate increase. Hints to a possible adjustment of statistical data and revision of official inflation plans (towards decrease), with regard to GDP (towards growth), salaries and employment indicators are an evident signal for extension of time with regard to the rates.
  2. New speculations that the current economic decline was stipulated by temporary weather and organizational factors. That front can't hide any more that the overvalued dollar and cheap oil significantly worsen economy condition. The recognition of this negative influence by FRS members placed on record will be another reason of dollar decline.
  3. Information regarding exports assessment. We should expect a clear opinion of FRS members regarding a rather greater danger of exports decrease than it is stated in Yellen's comments.
  4. In what way, FRS is planning to inform large-scale investors about the rates of expected period of tightening. Most likely, we should not rely on clear supply of concentrated information. The information with regard to new actions or changes of the policy will be supplied in small portions in the from of speeches and comments made outside of planned meetings.
US statistics of the coming week will be secondary, information regarding consumer price index may more or less affect the market. The planned FRS member speeches will hardly add positive to dollar in the midst of last week's bad statistics. It is only Yellen's speech on Friday that is of interest; however, her speech at the closing of the week will hardly give markets an additional driver. Today, in the midst of the Greek problems, it is very difficult, in the psychological sense, to buy euro. This way, the morning information that Greece was not able to make a technical agreement with creditors has already dropped EUR/USD more than by one figure at the opening of the European session. The relevance of 1.1426/50 mark and strong intraday range of resistance 1.1500-1.1450 has still been retained. In case of penetration of 1.1400, the mid-term goal will be 1.1560. The volume of speculative long positions for the last week has not practically changed, there is only an adjustment of short positions. Current resistance levels: 1.1320/25, 1.1330/40, 1.1370, 1.1410, 1.1450 Support levels: 1.1290, 1.12625, 1.12325, 1.1205, 1.1170, 1.1135, 1.1097. Downward pressure is being intensified by the levels of large Put options for 1.1300 – 1.1100 – 1.0800.The situation provides and opportunity to assume that the reversal of this tendency will happen only in case some extraordinary information appears.

Author: Navsher Bartash,
ForexChief Currency strategist