Post-Greek Spike in Dollar Not Sustained
June 29, 2015
Greece and China made big news over the weekend.
First from Greece: PM Tsipras threw world financial markets a curve ball, vesting the country’s decision on whether to comply with the terms of the creditors in the hands of the people to be decided by referendum next Sunday, July 5. If his intent was in part to demonstrate contagion, Tsipras has in part succeeded. Share prices fell so far by 3.9% in Spain, 3.8% in Italy, 3.2% in Germany and France, 2.3% in Finland, 2.2% in Norway and 1.6% in Great Britain. Peripheral spreads widened sharply in Greece but also in the cases of Portugal, Spain and Italy.
With the fate of Greece in limbo this whole week, the ECB froze ELA funding to Greek banks. Greek banks will be closed all week, and cash withdrawals from Greek ATMs cannot exceed EUR 60 per day starting tomorrow. Greece had to impose capital controls.
The Tsipras government is recommending a no vote in the referendum, but an opinion poll suggests a majority sentiment favoring a yes ballot.
The People’s Bank of China over the weekend cut the one-year lending and deposit rates by 25 basis points to 4.85% and 2.0%, respectively. In a somewhat rare move, the central bank simultaneously reduced reserve requirements on banks by 50 basis points to 18.0%. Monetary officials usually change one or the other of these two main policy tools but not both together. This latest monetary easing, the fourth interest rate cut since November, is officially meant to ensure that economic growth does not slow unduly below the 7% target, but the timing of the move was no doubt influenced by the over-20% plunge of Chinese stocks since June 12. 3.3% of that drop occurred today in spite of the central bank’s actions.
The breakdown in Greek talks and referendum surprise initially sent the dollar rising as high as 1.0954 per euro early today, but it fell back subsequently and, at $1.1114 currently, shows a net advance against the common currency of only 0.4% compared to last Friday’s closing level. Against other major currencies, the dollar has fallen 0.8% relative to the yen but is up 0.4% vis-a-vis sterling, 0.3% versus the Canadian dollar, and 0.1% against the kiwi. The dollar has dipped 0.1% against the Aussie dollar and is unchanged relative to the Swiss franc and Chinese yuan.
Swiss authorities played a key role in preventing a cumulating decline in the euro. The Swiss National Bank began buying euro against their own currency.
Besides today’s 3.3% decline in China, share prices elsewhere around the Pacific Rim fell by 2.9% in Hong Kong, 2.2% in Japan and Australia, 6.7% in Taiwan, 1.2% in Singapore, 0.6% in India and 0.8% in Indonesia and New Zealand.
The ten-year Japanese JGB yield is two basis points lower. Australia’s sovereign debt yield dropped 11 basis points and under the 3.0% threshold, and futures trading point to a likely slide in the U.S. Treasury yield of more than ten basis points at today’s open.
A 2.2% decline in Japanese industrial production in May was a much worse outcome than anticipated. Officials at Japan’s Ministry of Economics, Trade and Industry downgraded their assessment of IP to “fluctuating indecisively” from “shows signs of increasing at a moderate pace,” which had been the characterization for the prior five months. Industrial shipments fell 1.9%, and inventories jumped 1.9% as a percent of shipments.
Japanese retail sales, on the other hand, were better than forecast in May, rising 1.7% on month and 3.0% from a year earlier. It was the second month-on-month rise in a row. Large store retail sales were 5.3% greater than in May 2014.
Eurozone economic sentiment unexpectedly sagged to a 4-month low of 103.5 in June from 103.8 in both April and May. Industrial sentiment and retail sector sentiment also punched in at their lowest levels since February. Sentiment in construction and services improved, however. The business climate index halved to a 4-month low of 0.14.
All five reporting German states thus far announced lower inflation in June than May. The 1-month increases fell to 0.5% from 0.8% in Saxony and Bavaria, to 0.3% from 0.8% in Hesse, to 0.3% from 0.6% in Brandenburg, and to 0.3% from 0.7% in North Rhine Westphalia. Consumer prices fell on month in four of the states and were unchanged in the other.
Austria’s manufacturing purchasing managers index improved 0.9 points to a 14-month high of 51.2 in June, reflecting quickening growth in new orders. That subcomponent was at the best level since February 2014.
Spanish CPI inflation of 0.1% in June followed a 0.2% on-year dip posted in May. Spanish retail sales recorded a smaller on-year rise in May of 3.4%.
Norwegian retail sales, in contrast, were weaker than forecast, dropping 3.4% on month and 0.3% on year in May.
Portuguese consumer confidence fell a point to -20 in June, but business sentiment improved 3 points to -8. Irish retail sales increased 7.4% on year in May.
British mortgage approvals unexpectedly contracted 4.7% to 64.43K according to data collected by the Bank of England. M4 money rose 0.7% between May 2014 and May 2015.
Producer prices in Singapore plunged 8.3% in the year to May, a greater on-year drop than in April. Retail sales in Hong Kong rose 4.6% in the year to May, their fourth such increase in a row.
Scheduled U.S. data releases today include pending home sales and the Dallas Fed manufacturing index. Canadian producer price figures arrive, too.
Copyright 2015, Larry Greenberg. All rights reserved. No secondary distribution without express permission.
Tags: Chinese interest rate cut, German CPI, Greek referendum
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