Summer Market: Assessments and Problems Remain

Greeks have purchased another intermission. Britain is speculating with rates, and Canada is reducing them. FRS is watching and making conclusions
Last week was rich with fundamental factors (Greece, Yellen, ECB and Draghi, Banks of England and Canada); however, the general balance of power has remained the same. Greeks have purchased another intermission. Britain is speculating with rates, and Canada is reducing them. FRS is watching and making conclusions. Tsipras was forced, ultimatively, to accept the terms that are much worse than those before the referendum: strict control over banks, establishing of national (under external control) trust fund in the amount of 50 bln euros (under support of Italy and France, it was managed to base it in Athens), drastic increase of taxes, reforms of pension and labor systems to the general European level, and - no nominal debt write-off. Only restructuring in case of compliance will be possible. The split in the Greek party elite did not prevent the Parliament to pass the first laws required for prolongation of European aid for 3 more years; the Parliament was supposed to adot the remaining bills until July 22. On Friday, Eurogroup announced about its "intermediary financing" of Greece in the amount of 7.16 bln of euros (it will be enough for repayment of ECB/IMF debts on Jult 20; however, there is no money for August). Optimists expect the final agreement in about 4 weeks, but large investors do not count on it. Now, the capital does not want to buy Greek assets since the agreement is still questionable, and ECB will begin to accept Greek assets not ealrier that in a month’s time. Everyone prefers to wait. At the announcement of the EU leaders' summet results, euro experienced long-lasting and serious decline. Basic resistances: 1.1085/ 1.1035/ 1.0975/ 1.0910, supports 1.0855/ 1.0820/ 1.0800/ 1.0785/ 1.0660. The general direction is still downwards; however, in order to prevail, bears need to consolidate at 1.0785, and bulls need to close above 1.0975.

After the last Mark Carney's speech, the ideas of increasing British rates got a new impulse. Investors, who have been waiting for bullish market in pound, moved their expectations from August of the previous year, at least, to the month of May. The transfer of the date caused redistribution of investment funds from euro to pound and EUR/GBP pair dropped to its 7-year minimum, practically ingoring a strong option barrier at 0.7. The FRS winding path to rate increase forces to a new assessment of what has been going on in Britain. Attention should be paid not to the date of the first increase but rather to the speed of increase. If the historical average rate of the bank of England is 4.5%, then 2.5% by next summer it will be even slower than required. So, we will have to wait until Europe slightly calms down from Greek series and let's have a close look at MPC November and February meetings. Bulls ignore weak statistics on unemployment levels (5.6%) as market noise, and trading in pound is recommended: purchases GBP/JPY(1.34) and GBP/CHF (1.52-1.53) and sales EUR/GBP with the target of 0.67.

We rarely pay attention to Canadian dollar; however, last week, it made active speculators happy: at the beginning of the year, the regulator already made interventions into the rates in the midst of drastic decline of oil prices, and this time, history repeated itself, however, with complements. This step does not look positive today. The Canadian economy is pressurized by its neighbors: by American real estate market and weak GDP. The current decision to reduce the rate was influenced by weak national results for the 1st quarter and bad prediction for the nearest months (GDP decline for the 2nd quarter by another 0.5% and growth by 1.8% for the 3rd are expected). If that does not materialize, we will need to get ready for another rate reduction - however, not earlier than this October. On the forward market, speculatively large shorts in USD/CAD pair increase the danger of periodoc downfalls, therefore, it is recommended to close open longs partially in case of upward movement and open new only in case of mid-term adjustment to 1.2970/1.2930/1.2900. The growing trend has not been abandoned yet; however, it is strongly dependent on oil prices.

Dollar consolidated at 3-month minimum against all basic currencies. That puts pressure on American inflation (modest growth in June by 0.1% y/y) along with weak salary dynamics. Consumer prices continue to serve as a restraining factor for FRS. The raw materials market is expecting the Congress's difficult decision regrading approval of agreement with Iran. Yellen's speech does not eliminate expectations regarding rates during this year; however, the European crisis in the package with the Asian stock crisis, as well as the dynamics of American inflation may give FRS a multitude of variants for justification of further delay of any important decisions.

Author: Navsher Bartash,
ForexChief Currency strategist