The best performing currency last week was the CAD?!

The CAD was the best performing currency last week and it is has completely reversed its year to date performance from a negative to a positive gain since the Bank of Canada’s decision to keep rates on hold in mid-January. The CAD’s reversal of fortune can be attributed to firmer price of oil, stable equity markets, and to better economic performance with Canada’s biggest trading partner the USA. One prominent Canadian bank has gone so far as to proclaim that the worst is probably over for the CAD.

Looking at the daily chart of the CAD, there is good support around the 1.33 level and resistance around the 1.40 level. This trading range should contain future price action as long as the Canadian economy stabilizes, the price of oil continues to trade above the $30 range, and that the Bank of Canada remains on hold.

The stress factors that were driving the price action in the currency, bond, and equity markets from the start of the year have ebbed, for now. Those stresses were the volatility of the Chinese yuan, the fall in Chinese equity shares, the downward pressure on commodities, especially oil, and the fear that the US economy was showing signs of a recession. The fact that the CAD was the best performing currency last week speaks to this – the relief of anxiety over the stresses. On the opposite end of the spectrum, the ebbing of the collective stresses have been replaced by a new one – Brexit, "British exit", refers to the possibility of Britain's withdrawal from the 28-country bloc known as the European Union (EU), hence the 3.7% decline in the GBP last week.

The previous Friday, Prime Minister David Cameron had reached agreement with other EU leaders on changes to the U.K.’s relationship to the bloc. He laid out the key arguments he plans to use in his campaign, arguing that Britain is better off in terms of economic and national security within the EU, the destination for a significant portion of the U.K.’s exports. The GBP was actually buoyed by the agreement. However, the GBP quickly changed course and its losses accelerated after Boris Johnson, London’s mayor and one of the U.K.’s most prominent politicians, said he would campaign for Brexit. Johnson, a contender to become prime minister one day, is now the most high profile politician to back the “leave” campaign ahead of a referendum, now set for June 23.

How bad was the GBP’s fall last week? – it was down more than 500 pips, slicing through 30-year generational support at the 1.40 level. Since 1986, the GBP has experienced only 3-4 periods below $1.40. Was the move warranted? Frankly, no one is certain what Brexit would mean for the UK and Eurozone economies (after all, it’s never happened before), so because of this uncertainty traders tend to sell first and ask questions later. Last week’s losses have left the GBP technically oversold, and we should expect some sort of relief rally – although more selling would not be unusual.

Brexit would most certainly lead to Scotexit - Scotland exiting the United Kingdom. For the rest of Europe, the threat of Brexit has also opened up a Pandora’s box of fears about EU itself. If Britain did leave the EU it would open up the door to other EU countries which are unhappy with the current union. Little wonder then that euro has been drifting lower along with the GBP as investors grow increasingly wary of the whole region. Hyperbole you say! Then why did this weekend’s G20 warn against an exit from the EU?

5 Things to Know about Canada's Economy

5 Things to Know about Canada’s Economy
From the World Economic Forum

The sweeping election victory of Justin Trudeau’s Liberal Party has thrust Canada’s economic woes into the global spotlight.

The commodity-based economy is technically in a recession, owing in part to this year’s fall in oil prices. But the country is also suffering from deeper structural problems. Addressing these challenges and building an economy for the 21st century are among the key challenges facing Canada’s new prime minister.

Reliance on crude oil
Canada’s economy, ranked 11th in the world by GDP, has focused on resource extraction in recent years. While crude oil, Canada’s big commodity export, helped the country get through the global financial crisis relatively unscathed, the low oil price is now putting the economy under severe strain. This year, Canada’s economic performance has been the worst among a small group of developed economies that depend heavily on resources, such as Norway and Australia. Between June 2014 and July 2015, revenue from Canadian energy exports decreased 34.6%, forcing producers to cut back on jobs and investments.


Structural problems

The drop in global energy prices is not the only reason for Canada’s sluggish economy. There is much hand-wringing over Canada’s lack of innovative, globally competitive companies at a time when its traditional manufacturing industries are being eroded. Canada trails other developed economies in areas including corporate research and development, information technology investments, patents and productivity.

Debt and overvalued housing
There are concerns that ultra-low interest rates, currently at 0.5%, have been driving unsustainable housing booms, particularly in Toronto and Vancouver. Consumer debt is at a record 165% of disposable income, with most of the borrowing going into buying houses. Bank of Canada Governor Stephen Poloz said that increasing levels of household debt represent “a key vulnerability for the financial system”.



Budget deficits and spending
Canada’s recession made stimulating economic growth a key topic in the election. Conservative leader Stephen Harper, who stepped down after almost a decade in power, pledged to run a balanced budget. In contrast, Trudeau said he would tackle the economic downturn by running budget deficits of $25 billion over the next three years to fund infrastructure. The incoming prime minister has also pledged to cut income taxes for middle-class Canadians while increasing them for the wealthy.

The Keystone oil pipeline
Mr. Trudeau plans to address environmental concerns over proposals for the controversial Keystone oil pipeline, which has put relations between the US and Canada under strain. Mr. Harper had hoped the pipeline, which would carry crude from Alberta to Texas, would create jobs, but President Obama rejected the plan late last week. Essentially, the President was doing Hillary Clinton a favor in her run for the White House, but inadvertently did Mr. Trudeau a favor as well.









The USD was the undisputed winner on the week, easily outpacing its nearest competitor by a margin of 1.31%. The USD surged higher on the back of a very strong labor report that smashed expectations. The U.S. economy created 271K jobs for the month of October, which was the strongest monthly increase in payrolls this year. The unemployment rate also dropped to 5%, the lowest level since 2008. And for good measure, average hourly earnings rose 0.4%, which was the largest increase since July 2009. These strong numbers allowed the market to recalibrate the odds of December interest rate hike by the Fed from 56% to 72%. Meanwhile, the worst performing currency was the NZD after the latest Global Dairy Trade auction revealed that prices fell by 7.4%, the biggest drop in 3 months.

The Bank of England’s second Super Thursday triggered a selloff of 2.44% in sterling last week, its worst performance in eight months. Super Thursday occurs when the BOE releases its latest policy decision, the minutes of their deliberations and their quarterly forecasts for growth and inflation. The BOE left rates unchanged at 0.5% as expected with an 8-1 vote. However, it was the bank’s Quarterly Inflation Report that really tarnished sterling. The bank slashed inflation targets and GDP growth for 2016 to 1% and 2.5% respectively due to its concerns about global growth and the impact of commodity prices on inflation. Adding to the dovish tone, the central bank said that asset purchases (QE) would only be unwound when the key rate reaches 2%. Even though BoE Governor Mark Carney said in the press conference that it is “reasonably prudent to think BoE rates will rise in 2016”, the market pushed out the timing of its first interest rate hike due to the dovish Quarterly report. Thus, the BOE is still expected to be the second major central bank to hike rates after the Federal Reserve, however, the gap between the Fed's move and the BOE's move has widened causing the GBP to selloff.

Last week’s price action saw the pound hold support above the 1.50 level. If supports breaks that would open up a decline to the next support level just about the 1.48 level. Furthermore, the weekly close of the pound has bearish implications as it recorded an outside down week. Unfortunately, the pound could face more pressure this coming week as Premier David Cameron writes a letter to the EU setting out the UK’s conditions to remain in the EU, or said in a negative way, Britain’s EU exit warning.

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.

Water Cooler Talk

　

The GBP snapped a three week losing streak on its way to the top of the leader board. Not even a ratings downgrade from stable to negative in the UK’s credit rating by Standard & Poor's over the UK’s plans for an EU referendum was able to put a dent in sterling’s performance. The loser for the week was the NZD as it was crushed by the central bank’s 25 bp interest rate cut and its dovish insistence that further easing may be needed if future economic data is weak.

On to a topic we’ve discussed on and off over the past 12 months, currency wars. We know that there are people who doubt that a currency war is underway, but it appears that there are two types of currency wars going on right now based on media reports. First, last week began with comments about the USD being too strong that were attributed to President Obama by an unnamed French official. The comments were later denied by the President. Two days later, Bank of Japan Governor Haruhiko Kuroda suggested that the yen was unlikely to fall further on a real effective exchange rate basis because it was already "very weak". Yes we know that the purpose of the currency war is to weaken your currency in order to steal export market share from other countries and with this in mind, Kuroda’s.

comments were bullish for the yen, not bearish. Let’s keep in mind that he can afford to say this considering that the yen has moved from the 78 level to the 126 level in about 2.5 years, which works out to be about a 60% decline in the yen versus the USD. Two days later it was German Chancellor Merkel’s turn. She suggested that too strong of a euro would impede reforms in Spain and Ireland. Yup, no currency war going on here. Move along!

Second, the other currency war underway is the move away from U.S. hegemony (USD as a reserve currency). This can be seen by the setting up of parallel institutions like the IMF and World Bank led by China (BRICS Bank and Asian Infrastructure Investment Bank), and the accumulation of gold reserves by China and other central banks; and gold repatriation by certain western governments to bring home their gold stored outside their home country in places like New York and London.

These are interesting times indeed. Next week, keep an eye on the FOMC meeting, Greece, Deutsche Bank, and the Ukraine.

Greece Edges Closer to Default

 

Original article Found Here

The latest attempt to end the deadlock between Greek and EU officials in Brussels failed on Sunday. The negotiations centered on whether Greece would meet the EU's demands to make spending cuts worth €2bn (£1.44bn) in order to secure a deal that will unlock vital bailout funds. "European Commission President Jean-Claude Juncker made a last attempt this weekend to find, via personal representatives and in close liaison with Commission, ECB and IMF experts, a solution with Prime Minister Alexis Tsipras that would allow for a positive assessment in time for the Eurogroup on Thursday 18 June," the Commission said.

"While some progress was made, the talks did not succeed as there remains a significant gap between the plans of the Greek authorities and the joint requirements of Commission, ECB and IMF in the order of 0.5-1 percentage points of GDP, or the equivalent of up to 2 billion of permanent fiscal measures on an annual basis." The Commission said that Greece's proposals were "incomplete", which made negotiation difficult. The talks fell apart after just 45 minutes.

The failure to reach a deal on Sunday leaves a final decision on a possible default to Eurozone finance ministers. This meeting will take place on Thursday, the European Commission said, and will be a last chance saloon for Greece if it wants to avoid a default. A Commission spokesman said: "President Juncker remains convinced that with stronger reform efforts on the Greek side and political will on all sides, a solution can still be found before the end of the month."

 

 

The IMF's chief economist Olivier Blanchard wrote in his blog on Sunday that, "Greek citizens, through a democratic process, have indicated that there were some reforms they do not want. We believe that

these reforms are needed, and that, absent these reforms, Greece will not be able to sustain steady growth, and the burden of debt will become even higher." Pensions remain a sticking point for Greece, with Athens refusing to give in to further cuts. "These are tough choices, and tough commitments to be made on both sides," said Mr Blanchard.

Below are the key hurdles Greece faces in the coming weeks:

June 15: European Central Bank president Mario Draghi to give quarterly testimony at European Parliament; Greece likely to figure.

June 16: Austrian Chancellor Werner Faymann visits Athens

Greek PM Alexis Tsipras scheduled to fly to Russia - expected to meet Russian President Vladimir Putin at St. Petersburg International Economic Forum, June 18-20.

June 17: Governing Council of the ECB non-monetary policy meeting in Frankfurt

Greece to sell 1 billion euros of 3-month T-bills.

June 18: Eurogroup meeting in Luxembourg

European Council President Donald Tusk has signaled this might be the day when the currency bloc decides Greek "game is over". General Council meeting of the ECB in Frankfurt.

June 19: EU finance ministers meeting. Greece needs to refinance 1.6 billion euros in T-bills. Greece needs to service about 85 million euros in interest on bonds held by the ECB.

June 25-26: European Union leaders Summit in Brussels.

June 30: Greece’s euro-area-backed bailout extension expires

Total payments of more than 1.5 billion euros to the IMF come due, after decision to bundle tranches due earlier in June

July: About 1 billion euros in interest payments due

Bulk of amortization and interest payments due on July 18-20 on bonds held by the ECB

July 1: Governing Council of the ECB non-monetary policy meeting in Frankfurt

July 8: Greece to sell 26-week bills

July 10: Greece needs to refinance 2 billion euros in T-bills

July 13: IMF loans repayment totaling about 450 million euros due. Eurogroup meeting

July 14: Greece needs to repay 11.67 billion Japanese yen (about $93 million) in yen loans

July 16: Governing Council monetary policy meeting of the ECB in Frankfurt

July 17: Greece needs to pay about 71 million euros in interest on the 3-yr bond it sold in 2014

Greece needs to refinance 1 billion euros in T-bills

July 20: Greece needs to repay about 3.5 billion euros in bond redemptions; bonds held by the ECB

July 31: Moody’s due to review Greece’s sovereign debt

August: 600 million euros in interest payments

Includes an 80 million euro payment to the European Financial Stability Facility

August 1: Interest on IMF loans totaling about 175 million euros; payment due by August 5

August 5: Governing Council of the ECB non-monetary policy meeting in Frankfurt. Greece to sell 26-week bills

August 7: Greece needs to refinance 1 billion euros in T-bills

August 14: Greece needs to refinance 1.4 billion euros in T-bills

August 20: Greece needs to repay about 3.2 billion euros in bond redemptions; bonds held by the ECB

Dinosaurs!

This has nothing to do with FX or the economy in general, but it’s information that we think will make you feel like Cliff Clavin (if that’s your life aspiration) and the most popular person in your office today.

Jurassic World just had a massive opening weekend where box office receipts topped $511 million worldwide. In case you’re having a little trouble grasping this number, let’s put it into perspective.

According to World Bank figures from 2013, Jurassic World’s total revenue from June 12 to 14 is greater than the annual GDP of the following countries:

1. Tonga — $466.3 million

2. Federated States of Micronesia — $316.2 million

3. Sao Tome and Principe — $310.7 million

4. Palau — $247 million

5. Marshall Islands — $190.9 million

6. Kiribati — $168.95 million

7. Tuvalu — $38.3 million