Oximoron

Teetering Technical Recession

Canada may be teetering on the brink of a technical recession as business investment plunged in response to slumping crude-oil prices. Last Tuesday, Statistics Canada released the April GDP report and it showed that Canadian real GDP contracted for a fourth consecutive month, with real GDP down by 0.1% in the month. Market expectations were for a 0.1% increase in April. The data is raising concerns in the economy’s ability to post growth of 1.8% in the second quarter, which is what the Bank of Canada is expecting. This is raising speculation that the BOC could cut rates as soon as its next meeting on July 15th, which would weigh heavily on the CAD.

The BOC cut rates in January as an “insurance policy” for the economic fallout in the plunge in the price of crude oil. Crude oil was under pressure last week due to the increase in drilling rig counts and the possibility of a near term deal between Iran and the USA which would put more supply into the market. As you can see from the chart, the price of oil has stabilized over the last couple of months but it is in danger of slipping below its lowest level since mid-April. If it breaches that level the next support would be around the $52 level. The BOC will be watching the chart below very closely and may be tempted to take out another insurance policy by way of a rate cut.

The CAD fell through the green trend line on the daily chart on the negative GDP news of last week. The downside stalled near the mid-April low around the 0.79 level. However, increase speculation on another BOC rate cut and continued pressure on crude could put the mid-May low of 0.7780 in play. There is plenty of Canadian data this week - Ivey Purchasing Managers index, Business Outlook Survey, Building Permits, Housing Starts, and Friday’s employment data.

The Japanese yen finished at the top of the leader board last week as the yen did what it always does in a risk off environment – it races to the top as it benefits from safe haven flows. Interestingly, the commodity currencies of Australia, Canada, and New Zealand were the worst performers, and they all under-performed for the same reasons – risk off, lower prices of key commodities, and potential monetary policy moves. Greece and the Chinese stock market selloff have pushed safe haven flows to the yen and USD. The AUD was weighed down by declines in the price of copper and iron ore; the CAD suffered due to the down draft in the price of crude oil; and the NZD continued to suffer from the ongoing decline in milk as the GlobalDairy Trade index declined for the eighth consecutive week. The commodity price and economic backdrop for all three of these countries is putting pressure on their respective central bank to make some near term policy moves.


Over the weekend China demonstrated that it is very nervous about the 30% decline in its stock market since June 12. The week before the Chinese central bank lowered its key one-year lending and deposit rates and cut reserve requirements. These moves failed to arrest the fall in the stock market so on Friday more measures were announced by various group – 25 mutual funds companies stated that they would actively buy stocks and hold them for at least a year, 21 brokerage firms said they would invest 15% of their net assets (about $20 bln) in the ETFs of high capitalization stocks, and finally no new IPOs were being issued for the time being. These moves reek of desperation. The other big news over the weekend is that Greece voted “no” in their referendum. What this means precisely is unknown and it will probably play out over the following week, but we’ll go into further detail below.

Greece: The Unknown Abyss

In a previous blog post "More Cowbell?", we talked about possibly scenarios that might play out with a “no” vote. Well, we’re here, and frankly speaking, absolutely nobody knows what’s going to happen in the near- and long-term. However, everyone does agree that something must happen very quickly. Allianz’s Mohamed El-Erian offered a brief preview of what will happen next as a function of three main things:

 Whether Greece and its creditors can work together to reconcile what were two very different interpretations in the run-up to today as to what a “no” outcome means, and do so very quickly and effectively;

 Whether already horrid conditions on the ground, including the high likelihood of further delays in re-opening the banks and significant difficulties getting fresh money into ATMs, provide enough time for the politicians to get their act together; and

 Whether the ECB rolls out new measures to contain contagion.

The fallout from the “no” vote has already begun as the embattled Greek Finance Minister, Yanis Varoufakis resigned. In a blog post, Varoufakis stated, “"I was made aware of a certain preference by some Eurogroup participants, and assorted 'partners', for my ... 'absence' from its meetings; an idea that the Prime Minister judged to be potentially helpful to him in reaching an agreement. For this reason, I am leaving the Ministry of Finance today." He continued, "I shall wear the creditors' loathing with pride."

Speaking of creditors, no discussion on Greek debt is complete without identifying who is owed. Currently, Greece’s public debt stands at €323 billion, which is nearly 175% of the country’s GDP. You don’t need us to tell you that this is completely unsustainable.

There are simply too many unknowns to get into a deep analysis of what might happen in the coming days and months. As we said earlier, the process must start very quickly and openly so that the markets find some stability. In addition, the last thing we want to do is misguide you as you make decisions on your personal or corporate exposure to FX, particularly the EUR. That said, we love an informed customer, so please call us at 604-685-1016, or email us at info@vbce.ca. We would be more than happy to give you up-to-the-minute information on what’s going on in the markets.

The FX Roundup

We did not see this coming. I’m not referring to the “ohi” (otherwise known as “no”) vote delivered by the Greek people (for you students of Modern Greek “ohi” is pronounced “o-hee” with a guttural “hee”). I am referring to the mandate delivered; a clear margin of victory for those rejecting the proposed austerity measures. While the market waxes and wanes some minor details need to be worked out, such as “Is the referendum binding?”, and “If so, how?” Maybe this whole matter needs to be kicked upstairs. As Axel Schaefer, a deputy head of the Social Democrats in Germany suggested: “EU leaders must get together immediately, even on Monday. The situation is too serious to leave to finance ministers”. This quote is so funny on so many levels we don’t even know where to start. We will say that we're calmed by the fact that it appears that someone important in Europe will be taking a look at this problem in the next 24 hours.


We will be bombarded with lots of news and commentary from all corners of Europe over the next few days so we think it’s better to keep our own powder dry with respect to addressing where we go from here. Greek Prime Minister Alexis Tsipras tweeted out “Today's referendum doesn't have winners or losers. It is a great victory, in and of itself…. The mandate you've given me does not call for a break with Europe, but rather gives me greater negotiating strength.” We will see about that in 6 months if after rejecting the bailout terms Greece teeters on the brink of total collapse before capitulating to something far more draconian than the deal on the table today.

Ο ανήφορος φέρνει κατήφορο

With his back to the wall, the Prime Minister of Greece, Alexis Tsipras, did what every politician in his position would do – he made a political move by calling for a snap referendum to be held on July 5. The question to be put before voters is whether or not the country is willing to submit to the conditions being demanded by the International Monetary Fund, European Union and European Central Bank. This may be a moot point because the IMF is owed a payment on June 30th; this will not be made and opposition leaders may call for a no-confidence vote. If successful, it would cause a new government to be formed or the dissolution of the government and new elections. As you can see there are still many unknowns at play here.

What we do know is that the Greek banks have no more money, so a bank holiday and capital controls was implemented yesterday (Monday, June 29th). For the rest of the Eurozone, we are sure that the key leaders of each country will have that Boomtown Rats song playing in the back of their heads – “I Don’t Like Mondays.” We can see headline already – “Black Monday”, “Lehman Weekend”, “Opa Oops”. As we write this commentary, trading has opened and the Euro has gapped down.

Lest we forgot, the other big news was that on Friday out of China. China’s central bank cut reserve requirements up to 50 bps and cut the benchmark one-year deposit and lending rates by 25 bps. Strap on your seat belts because this is going to be humdinger of a week!
What are the Capital Controls in Greece?

During the summer months, Greece isn’t typically known for high-stakes drama, but in the last few days, negotiations between Greece and its European paymasters indicate that the country’s economic crisis is approaching a breaking point. Briefly summing up the banking crisis, deposits fell to an 11-year low in May and have lost nearly 15% of their value since November. Stoking the flames is the fact that wealthy Greeks pulled their money out of Greek banks as soon as the Leftist Syriza government came to power in January with the promise to end austerity. With tomorrow’s bail-out expiry looming, more and more ordinary citizens have started queueing up at ATM’s to pull out their savings in fear of a full-blown banking collapse.
The Greek government implemented a number of measures in the early hours of Monday to keep money in the financial system. Here is a summary of the capital controls that were implemented to protect the financial system:

 From Monday, June 29, 2015, banks will remain closed up to and including Monday, July 6;

 Deposits are fully safeguarded;

 The payment of pensions is exempted from the restrictions on banking transactions. Management of credit institutions will announce how these will be paid;

 Electronic transactions within the country won’t be affected. All transactions with credit or debit cards and other electronic forms (web banking, phone banking) can be conducted as normal;

 Prepaid cards may be used to the limit existing before the beginning of the bank holiday;

 From midday June 29, ATMs will operate with a daily cash withdrawal limit of 60 euros per card, which is equivalent to 1,800 euros a month;

 Foreign tourists can make cash withdrawals from ATMs with their cards without restrictions provided these have been issued abroad; and

 A special Committee to Approve Bank Transactions has been established at the State General Accounting Office in cooperation with the Finance Ministry, the Bank of Greece, the Union of Greek Banks and the Capital Markets Commission. This committee will deal with applications for urgent and imperative payments that can’t be satisfied through the cash withdrawal limits or by electronic transactions (e.g. payments abroad for health reasons). Wages paid electronically to bank accounts aren’t affected.

The question becomes, will the capital controls affect the outcome of the referendum? It’s hard to dissect the psyche of the average Greek citizen at the moment. Waking up in the morning to find out that you can only take out 60 Euros per day will certainly have a big impact. But if the Greeks think that the Europeans are cutting them off, it could push them to vote “No” and reject the bail-out deal. On the flipside, the prospect of life under capital controls could scare many into voting “Yes” out of fear of things to come should they leave the Euro.
Hold on to your hats – HUGE week ahead!

Oh yes, before we sign off, you may be wondering about the title of this piece, Ο ανήφορος φέρνει κατήφορο, which in Greek means the uphill is followed by a downhill. It’s the equivalent of what goes up, must come down.