The next best performer... RBNZ and the Haka interest rate cut!

The best performing currency last week was the euro – why? Didn’t you hear everything is resolved?! Sorry, we couldn’t resist, but the situation is actually far from it. The only reason the euro went up is because the Greek government managed to pass the legislation that the Eurozone demanded before any negotiations of a third bailout package. As a reward for doing what was dictated, Greece received a €7bn bridge loan. Unfortunately, the Greek government received very little of the loan as it was quickly directed towards repaying debts to the ECB and IMF.

The next best performer was the NZD. The Reserve Bank of New Zealand cut interest rates by 25bp last week for the second time in a row due to softening economic outlook and inflation. The RBNZ said that further easing seems likely and a further drop in the currency is necessary, which would normally be a negative for the currency. However, the NZD rallied hard because the RBNZ dropped the reference to the NZD being "over-valued" or "unjustifiably high" in its announcement. Meanwhile, the AUD was the worst performer last week as it fell to fresh multi-year lows due to the sharp slowdown in Chinese manufacturing activity. As for last week’s dual winners the USD and GBP, they took a break after their spectacular gains in the month of July to quietly correct and work off their overextended gains.

The peso has been trading in a negative territory since mid-July due to the rout in commodities. The domestic economy is growing at a slow pace however the jobless rate fell to 4.41% in June. Thus, there is another factor at play here. The peso happens to be one of the most liquid currencies in the sphere of emerging markets. Thus, if investors fear problems in EM they will sell the peso regardless of their view of the Mexican economy itself. That is what is currently happening as investors fear monetary tightening by the US Federal Reserve. The worry is that a rise in interest rates in the U.S. will cause the debt servicing to rise on the roughly $4.5 trillion dollars in EM loans. Complicating the matter is that most of the EM countries rely on commodity exports and/or Chinese growth, thus they are getting hit by a double whammy – decreasing export revenues and increasing debt servicing costs.

Having said this, according to Citi there is another factor at play in the peso’s weakness. Citi’s research shows that the foreign exchange flows handled by the bank on behalf of its clients flow into real money accounts, leveraged accounts, corporates, and banks. Its latest date shows that USDMXN transactions flows into the first three categories has been neutral over the year, but flows by banks has been strongly negative. So what does this mean? It means that the Mexican people themselves are responsible as they are converting their pesos into USD and depositing them in USD accounts at their banks. Hmmm, they must know something that the rest of us don’t.

The key events for this upcoming week are the FOMC rate decision and Q2 GDP report. While we are not looking for the Fed to raise interest rates in July, most economists expect the first interest rate hike in 8 years at the September FOMC meeting. Also, remember that Chair Yellen indicated at her semi-annual testimony on Capitol Hill that her preference was to start raising rates earlier so that monetary policy can be tightened at a more gradual pace going forward. All we can say about this is we wonder if she will be able to pull the trigger if China keeps slowing, world trade volume drops for a 7th month in a row, and oil fall below the March low of $42.

The US Fed Decision and Commodity Currencies

The currencies of commodity-exporting nations including Australia, New Zealand, Canada, Brazil and Indonesia are near the lowest in at least 4 years as the market braces for a Federal Reserve statement tomorrow that may indicate it is ready to raise interest rates – it’s not likely that the Fed will make actually make a move this week, but economists and analysts aren’t expecting anything more than indications that September is when we’ll see the first hike in rates in several years.

The market is hotly awaiting the post-meeting comments for hints of a rate increase and should that happen, then expect another surge in the USD and further downward pressure on currencies of the aforementioned nations. These nations are hoping that Fed Chairperson Janet Yellen will portray a cautious tone in her statement, which would pause a sell-off in AUD, NZD, CAD, BRL and IDR.
“Commodities are very much in the forefront of markets’ minds and commodity-linked currencies are definitely under pressure,” said Sam Tuck, a senior currency strategist at ANZ Bank New Zealand Ltd. in Auckland. “The majority in the market believes Yellen will remove patient” from the Fed’s pledge on interest-rate policy, he said.

New Zealand’s currency weakened last week after the whole milk price index fell almost 10% in a GlobalDairyTrade auction. The Aussie has been falling amid a decline in prices for iron ore and prospects for a further interest rate cut, with the Reserve Bank of Australia’s March 3 meeting minutes released yesterday reiterating an easing bias. And energy makes up the bulk of Canadian, Brazilian and Indonesian exports. Therefore, a sharp decline in energy, gold, dairy and metals combined with a mix of a strong dollar and a weakening Chinese economy plus looser monetary policy (except for Brazil where rates are still high) – what you get is a flood of commodity bears in full-force to claw down the value of commodity currencies.

Market strategist for IG feels that tomorrow's meeting has the possibility to be a boon for the disintegrating commodity sector. In a note from this past Monday morning, IG said that, "The Fed policy statement release may actually halt the USD bulls." The note further states that "Expectations are low for any major divergence from current language or action. The FOMC may even be a little more cautious about the current market and economic conditions. This would see a quick unwind in oversold markets: Oil and industrial metals would likely rise and a likely drop in the USD would transpire."

Puzzled?

Earlier this month we speculated that the Bank of Canada could cut interest rates after the negative April GDP print; and in last week’s blog post we said that we would be shocked if the BOC didn’t cut because of the string of negative data point after the disappointing April GDP report. Faced with a firestorm of recession talk, the BOC had no choice but to cut interest rates by 25bp to 0.5%. The CAD was promptly sold hard to six years lows. The price action far exceeded our expectations especially after the BOC raised the possibility of QE, if necessary, indicating that this move may not be the end of its easing campaign.

Bank of Canada Governor Stephen Poloz refrained from using the R word by stating that "real GDP is now projected to have contracted modestly in the first half of the year." The BOC also lowered its 2015 growth forecast from 1.9% to 1.1%. For 2016, it expects the economy to grow by 2.3% versus a previous forecast of 2.5%. The economy is not expected to return to full capacity until 2017. As for inflation, the underlying estimate is now 1.5% instead of 1.7%. As you might imagine, the decline in the price of crude oil was the major culprit in the adjusted forecasts.

In the press conference after the policy announcement, Governor Poloz said two things that really
stand out and didn’t seem to receive enough press. He mentioned that he was puzzled that the weaker CAD failed to improve non-energy exports. This statement struck a chord with us because two other countries have had that similar experience. The weak yen has not caused a surge in Japanese exports. Similarly, the weak euro has also not caused an increase in exports as evidenced in the recent Eurozone May trade figures which showed that exports fell 1.5%. We are not sure why this would be puzzling – after all, central banks are engaged in a currency war and no country can gain an advantage if all central banks are counter acting other bank’s moves with matching simulative monetary policy measures.

The other thing that Poloz said was that he expected the Canadian economy to be less in sync with that of the U.S. Are the economic cycles of the two nations that much out of sync? Many economists certainly think so – according to a recent survey in the Wall Street Journal, 82% of economists expect a Fed hike in September. If that is the case, the CAD is in for way more downside that anyone currently expects.

Still the One

With Greece and the Chinese stock market off the front pages, safe haven flows subsided and the monetary divergence theme reasserted itself as the driving force in the currency markets. Last week, the GBP was the top performer as positive economic data, including accelerating employment earnings, and a chorus of Bank of England members sounding more hawkish about a rate hike. This caused the timing of a UK rate hike to move from Q2 2016 to Q1. Having said this, the U.S. is still the one. No, we are not referring to the 70s soft rock ballad by Orleans but rather the only major central bank that is on course to raise interest rates in 2015. Federal Reserve Chairwomen Janet Yellen was on Capitol Hill last week and she stuck with her script by reaffirming that the central bank was on track to raise interest rates this year. If you remember, this is the very same driving force that prevailed in January of this year as the rate hikers were the top performers while the rest of the countries were moving in the opposite direction.

Apart from the central banks of the US and UK, the other major central banks have either a neutral bias or are in easing mode. The ECB left its policy unchanged at last week’s meeting and reaffirmed that the conditions of low inflation remain. Thus, its policy of bond purchase will remain in place. The Bank of Japan also had its meeting last week and it adjusted its inflation forecast – it no longer expects to hit its inflation target until after 2018 which means that it may need to apply more stimuli in meetings to come.

China reported a slew of key economic indicators last week, including Q2 GDP. It announced that its quarterly GDP came in right on target at 7%, like it always does. However, this time the chorus of investors responding with disbelief was louder than ever. No one believes their data anymore. Leaving this aside, China will probably need to administer more stimulus but more importantly their economy is not growing like it was, which is putting tremendous pressure on commodity prices and the economies of the countries that produce them – Australia, New Zealand, and Canada. Australia was the best performer of the countries in easing mode mainly because their next central bank meeting isn’t until the beginning of August. New Zealand was the worst performer because their next central bank meeting is next Wednesday; and after last week’s disastrous dairy auction, the odds have increased dramatically that the RBNZ will cut rates by 50 bps instead of 25 bps.

Tony Valente
Fred Maurer

Gold just hit a five-year low.
View Article here

On Friday morning, the precious metal fell more than 1% to as low as $1,129.80 an ounce, the lowest since 2010.

In a morning note to clients on Friday, Accendo Markets wrote: "Gold ($1,144) lower yet again after the German conservatives voted to start talking about the details of a third Greek bailout while Grexit plans were locked away for the time being. So when investors are confident, they sell gold; when they're worried, they don't buy it. A strong US dollar with all this talk of interest-rate hikes likely contributing to gold's seeming change of purpose of late with the three-month downtrend intact."
China on Friday disclosed how much gold it was holding for the first time in six years. Its reserves rose 57%, and it is now the fifth-largest holder of gold.

Gold mining stocks are getting slammed. Shares of Barrick Gold Corporation, the largest gold miner in the world, fell more than 5% – the lowest in 24 years. Newmont Mining shares fell 2%.
Here's a chart showing the slide Friday morning:


Finviz

And here's a five-year chart of the price of gold:



Read more: http://www.businessinsider.com/gold-price-july-16-2015-7#ixzz3gAOh8Efs

We have an Agreekment

Greece’s Bailout Deal Explained with a Euro-Parable

The following parable pretty much explains the bailout deal reached late Sunday night. This actually made the online rounds back in December 2011, but it still applies today and isn't that much of an exaggeration. Enjoy!

It’s a slow day in a little Greek Village. The rain is beating down and the streets are deserted. Times are tough. Everybody is in debt. Everybody lives on credit. On this particular day a rich German tourist is driving through the village. He stops at the local hotel and lays a €100 note on the desk, telling the hotel owner he wants to inspect the rooms upstairs in order to pick one to spend the night.

The owner gives him some keys and, as soon as the visitor has walked upstairs, the hotelier grabs the €100 note and runs next door to pay his debt to the butcher.

The butcher takes the €100 note and runs down the street to repay his debt to the pig farmer.

The pig farmer takes the €100 note and heads off to pay his bill at the supplier of feed and fuel.

The guy at the Farmers’ Co-op takes the €100 note and runs to pay his drinks bill at the local tavern.

The tavern owner slips the money along to the local bookie drinking at the bar, who has also been facing hard times and has had to offer him bets on the horses using.

The bookie then rushes to the hotel and pays off his room bill to the hotel owner (he drank too much one evening and couldn’t drive home) with the €100 note.

The hotel proprietor then places the €100 note back on the counter so the rich traveller will not suspect anything.

At that moment the traveller comes down the stairs, picks up the €100 note, states that the rooms are not satisfactory, pockets the money, and leaves town. No one produced anything. No one earned anything. However, the whole village is now out of debt and looking to the future with a lot more optimism.

And that, dear readers, is how the bailout package will work!

Yes, we finally have a deal in Greece, but by many accounts it is not materially different from the deal(s) Greece rejected over the past few weeks. The fallout from the Greek street has been swift. Now Prime Minister Tsipras has to get to work convincing the Greek people that as difficult and long as the path ahead may be, it’s the only way out.

If you would like to read the Euro Summit statement, you can find it here. Its main points include:

 A "significantly scaled up privatization program with improved governance."

 "Ambitious pension reforms" and measures to make the system more affordable.

 General deregulation and liberalization of Greece's market economy, with areas such as pharmacies being opened up to more competition.

 A "rigorous review" of modernizing the Greek labor market.

 Depoliticizing the Greek governing establishment — it's a common criticism that Greece's government is riddled with cronies from whichever administration is in office at the time.

 Amending or rolling back some legislation that has been passed in Syriza's first six months in power, much of which ran against previous bailout deals.

Margin Call

Currencies were under a lot of pressure for the first three days of last week as safe haven flows into the yen and USD dominated due the continued uncertainty in Greece and China. By Thursday, safe haven flows subsided and gradually reversed as the slew of Chinese government measures utilized to stop the equity markets from falling finally took hold. For now, this helped to stabilize the market and allowed currencies to rebound against the yen and USD. Stability continued to take hold on Friday as a sense of optimism over a potential Greek deal emerged. Thus, the only two currencies that moved by more or less than 0.50% for the week were the AUD and CAD.

It’s not surprising to us that the two outliers for the week were the AUD and CAD because it’s become apparent that the turmoil in the Chinese equity markets, and the slower economic growth in China in general, have weighed heavily on commodity prices. The fall in energy (oil for Canada) and industrial commodities (iron ore and copper for Australia) show no sign of abating as of yet and will continue to cast a long shadow on the respective currencies.


New Zealand may be spared the brunt of the fallout as agricultural commodities are more insulated from economic downturns in general since people still need to eat. Having said this, the fall in the two currencies last week was all about monetary policy. In Australia, on Tuesday keeping interest rates on hold at 2% for the second-straight month. However, the Aussie fell anyway after Reserve Bank governor Glenn Stevens said "further depreciation (in the currency) seems both likely and necessary, particularly given the significant declines in key commodity prices”.

Meanwhile in Canada, the key driver in CAD weakness was the cumulative soft economic data on top of the prior week’s negative GDP growth for April. Speculation has risen that the Bank of Canada will deliver a rate cut at tomorrow's policy meeting. Frankly, we would be surprised if they choose to wait until their September meeting given the string of disappointing data and the characterization of its surprise January rate cut by Bank of Canada governor Stephen Poloz as an “insurance policy”.

As we pen this blog, we feel a sense of exhaustion over thinking about the deal between Greece and the Eurozone. After the last couple of weeks we think that everyone, including ourselves, is suffering from crisis fatigue – not just about Greece but the 30% drop in the Shanghai Composite index over the last 3 weeks and 20% drop in oil, just to name a few. All of this is resurrecting fears of deflation or disinflation again, which may kick off a new monetary easing race by central bank; like it did in January of this year. Therefore, central banks look to ease policy further or to leave rates lower for longer.

Whatever happens in Greece is critical for the week ahead in markets, but what transpires in China will matter for many more months. Why? Because it renews fears of downside risks to global growth. We mentioned last week that China’s array of policy measures to arrest the fall in their stock market reeked of desperation. Unfortunately, last week they had to deploy even more measures before the stock market was able to stabilize. This stability will only last a short while because the reason behind the plunge in stock is margin calls. Investment bank, Goldman Sachs, notes that China’s margin debt is the highest in history of global equity market and stands at 12% of the free float market cap of imaginable stocks. So when equity prices began to fall about 4 weeks ago, it set off a wave of forced selling of shares due to margin calls. And with more than 90 million "retail" investors involved in the stock market, more downside is expected due to forced selling created by margin calls. The fear for all of us is that the stock market crash will dent Chinese consumer sentiment and derail whatever economic momentum China has left, which in turn could spread and derail the global economy.

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.

Meet your CSR: Q&A with Jocelyn H.

You might recognize Jocelyn from VBCE. Perhaps you've had the pleasure of having her serve you right before you took off for one of your eagerly anticipated vacations. Or maybe she provided you advice on how to help you save more money for your business. What you may not know are all the tiny details of what makes Jocelyn so special to all of her co-workers here at VBCE.  In this month's post of 'Meet Your CSR' we asked Jocelyn a few questions to help you get to know her better!

Tell us a little bit about yourself

I can speak Mandarin, Cantonese, English and Taiwanese

What thoughts come to mind when you tell people you work at VBCE?

We not only offer the best rate in town, but also have various services to satisfy customers' needs.

What is your dream destination for a vacation?

Maldives

Favorite song you would listen to on your dream vacation?

Just the way you are-By Bruno Mars 

If you could take one person on a dream vacation with you, who would it be?

My fiance

Tell us about a stand out customer that you have previously serviced.

Lily L. came in to exchange 200 British Pounds Sterling cash for her trip. After having deep conversation, I discovered that she has a daughter studying law in the UK and needs to send her tuition money every half year. I introduced her to our electronic service and she very much appreciated the service we have to offer. Lily has now become a regular client and often refers all of her friends to come to VBCE!

Give us a Foreign Exchange tip every savvy customer should know.

Always mention about the preferred rate for every visit with us to save money.

What is your favorite piece of bullion that you have ever come across?

RCM Silver Maple. It is the best gift for any occasion!

All Eyes on Greece. Imagine running out of money

Greece crisis: This is what will happen if Greece runs out of money and has to reinstate the drachma
View article here

The Greek finance minister Yanis Varoufakis said on Australian radio this week that Greece couldn’t reinstate the drachma – the currency it used before it adopted the euro in 2001 – even if it wanted to. Why?

"We don't have the capacity," Varoufakis told Australian public radio network ABC. "In order to impress upon the world that [joining the euro] was not a temporary phenomenon we smashed the printing presses! So we have no printing presses."
Nonetheless, Greece may run out of euro-backed money in just a few days. It only has enough Emergency Liquidity Allowance to last until Monday. Once that runs out, it may have to find a way to reinstate the drachma.
Alex Jurshevski, the founder of Recovery Partners Limited, worked to restructure New Zealand’s debt in the ninties and during the Iceland crisis more recently. He said that once the Greek central bank had obtained reserves of drachma, either by importing or printing, the process of switching back would be swift.
Greece's banks are only open for pensioners. If it instated the drachma, capital controls could be in place for much longer. “They’d have all the bills printed up,” he said in an interview. “They’d be waiting in a bunch of dump trucks.” After a bank holiday for a few days to make the switch, the banks would open again for business.
“It would happen, boom, like that,” Jurshevski said.
Once the drachma had been instated, it would likely tumble against the euro, meaning the government would have to print even more to keep up. Capital controls, limiting the amount of money people can withdraw, would have to be put in place to stop a run on the banks.
 

The old 1,000 Greek drachma notes and current 20 euros This could result in social unrest. Experts at Barclays said that historically similar moves have caused between 45 and 85 per cent devaluation of the currency. Capital Economics suggests that the drop could be more mild, closer to 20 per cent, and Oxford Economics says 30 per cent, Business Insider reports.
Inflation would likely spike, causing prices for everyday goods in Greece to rise dramatically, but this would stabilise once the new drachma found its value against the euro.
Despite these immediate effects, some analysts think Greece might actually be better leaving the euro in the long term. According to Capital Economics, a managed exit “could even end up as a favourable economic development for both Greece and the rest of the euro-zone”.



HAPPY JULY 4TH! U.S MARKETS ARE CLOSED TODAY

 

Key Economic Data Releases:

- U.S. Markit services PMI: 58.5 (exp. 57.4)

 

 

Key Event Calendar:

DATE	CANADA	U.S.A.
July 6	Ivey purchasing managers index	ISM non-manufacturing PMI
July 7	Int’l merchandise trade	Trade balance
July 8	Building permits	Crude oil stocks change, FOMC minutes
July 9	Housing starts	Initial jobless claims
July 10	Net employment change	Fed Yellen speech
	Unemployment rate

 

 

Yesterday, USDCAD initially climbed from 1.2579 up to a 3 month high at 1.2633 before easing back to 1.2600 ahead of the 5:30am U.S. employment data. The report was weaker than expected and included a negative revision of 60,000

jobs to prior data. Initially, USDCAD jumped to 1.2620, dropped to 1.2558, and then climbed back to 1.2603. From there USDCAD faced downward pressure and finished the day near 1.2540. With U.S. markets closed today, USDCAD remained confined to a 1.2540 – 1.2568 range overnight followed by a test of 1.2600 this morning. The pairing has since fallen to 1.2570. The yen has been the best performing currency today and JPYCAD is near a two month high. Uncertainty surrounding Sunday’s Greek referendum remains as polls suggest a fairly even split over whether to accept a bailout agreement. Currently, the TSX is up 0.05% while the DJIA is closed. EURCAD is up 0.35% trading between 1.3902 and 1.3986. GBPCAD is up 0.25%, trading between 1.9572 and 1.9675. JPYCAD is up 0.55% trading between 0.01019 and 0.01026. Gold is up 0.28% trading between $1,165 and $1,170USD/oz., silver is up 0.53% trading between $15.63 and $15.73USD/oz., while oil is down 1% trading between $55.78 and $56.76.

Sources: Reuters, Bloomberg, FXStreet, RBC Capital Markets, Bank of Canada, U.S. Federal Reserve, CNBC, Forexlive

Varoufakis Says He’ll Resign as Greece Finance Minister if Referendum Endorses Bailout

Varoufakis Says He’ll Resign as Greece Finance Minister if Referendum Endorses Bailout

Article Can be found here

 

ATHENS — Finance Minister Yanis Varoufakis of Greece said on Thursday that he would resign immediately if Greeks voting in a referendum on Sunday endorse efforts to secure an international bailout deal for the country. His comment is the starkest sign yet that the government of Prime Minister Alexis Tsipras is likely to be reshuffled or could even fall if a yes vote prevails.

Mr. Tsipras’s government has been exhorting Greeks this week to vote no in the referendum, which, while couched in confusing language, effectively asks whether the nation is willing to accept more austerity in exchange for billions of euros that the country needs to return to solvency.

After a remarkable series of twists and turns in negotiations with creditors this week, the proposal on which Greeks will be voting is no longer even on the table, as the bailout package expired Tuesday night.

 

 

Nonetheless, in televised remarks and interviews played on repeat on almost every Greek television station, Mr. Tspiras and Mr. Varoufakis have urged Greeks to vote against the package. They say that a no vote would give the government a stronger hand in negotiations with Greece’s creditors, as Athens seeks to repudiate austerity and to reduce its mountainous debt load, one of the world’s largest.

 

If Greeks were to vote yes, it would signal their desire to accept the bailout with austerity conditions that Mr. Tsipras has been pushing against, and it would effectively be a repudiation of Mr. Tsipras and his government’s negotiating strategy. That could lead not only to to Mr. Varoufakis’s resignation but also to the withdrawal of numerous other government members from Mr. Tsipras’s leftist Syriza party — and possibly of Mr. Tsipras himself.

In an interview with Bloomberg Television on Thursday, Mr. Varoufakis said that he would not remain finance minister after a yes vote, but that he would help his successor steer Greece out of its debt crisis. He added that he would “rather cut off” his arm than sign a new deal with creditors that does not restructure Greece’s debt.

 

 

By continuing to accept bailouts with austerity conditions, Mr. Varoufakis argued in an interview after being installed as finance minister in January, Greece has piled debt on top of debt, while subjecting its people to “fiscal waterboarding, where we are constantly having our head held under water.”

In a blog post Wednesday afternoon, Mr. Varoufakis offered six reasons Greeks should vote no in Sunday’s referendum.

But an opinion poll on Wednesday by euro2day.gr showed that the results of the referendum were too close to call, with 47 percent planning to vote yes and 43 percent veering toward the no position that Mr. Tsipras’s government wants.

VBCE Daily Foreign Exchange Update for Thursday, July 2nd 2015

D spot rate: 1.2560 - 1.2565 (AS AT 8:49AM PST)

Ranges:
Asia

RANGES:	Asia:	1.2579	to	1.2597
	Europe:	1.2585	to	1.2633
	North America:	1.2558	to	1.2620

Technical Support / Resistance:

S2	S1	R1	R2
1.2450	1.2500	1.2633	102715

Key Economic Data Releases:

-Canada RBC manufacturing PMI: 51.3 (prev. 49.8)

-U.S. Non-farm payrolls: 223,000 (exp. 230,000)
-U.S. unemployment rate: 5.3% (exp. 5.4%)
-U.S. labour force participation rate: 62.6% (prev. 62.9%)
-U.S. Average hourly earnings y/y: 2.0% (exp. 2.3%)
-U.S. factory orders: -1.0% (exp. -0.5%)

Key Event Calendar:

Date Canada USD     July 3rd       Markit  Services PMI

Yesterday, USDCAD climbed higher in holiday trading as oil declined by 4%. USDCAD traded from 1.2475 up to 1.2595 with almost no correction / pull-back. The pairing continued higher overnight reaching a 3 month high of 1.2633 before easing back to 1.2600 ahead of the 5:30am U.S. employment data. The report was weaker than expected and included a negative revision of 60,000 jobs to prior data. Initially, USDCAD jumped to 1.2620 as the headline unemployment rate declined to 5.3%. Once the market digested the fact that the participation rate was 0.3% lower and there was no wage growth, USDCAD dropped to 1.2558 on broad-based USD weakness. USDCAD subsequently bounced to 1.2603 before falling back to 1.2560. Currently, the TSX is up 0.35% while the DJIA is down 0.30%. EURCAD is up 0.25% trading between 1.3894 and 1.4000. GBPCAD is down 0.15%, trading between 1.9600 and 1.9724. JPYCAD is unchanged trading between 0.01020 and 0.01023. Gold is down 0.52% trading between $1,157 and $1,169USD/oz., silver is unchanged trading between $15.51 and $15.80USD/oz., while oil is up 1.25% trading between $56.81 and $57.92.

Sources: Reuters, Bloomberg, FXStreet, RBC Capital Markets, Bank of Canada, U.S. Federal Reserve, CNBC, Forexlive

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.

More Cowbell?

Surprisingly, the biggest story of the week wasn’t Greece but the USD and the Fed. Federal Reserve Chairwoman Janet Yellen emerged from a two day policy meeting to declare that the FED NEEDS “MORE DECISIVE EVIDENCE”. More cowbell? Are you kidding?! It seems that every time the market’s perception gets closer to thinking the Fed is about ready to finally raise interest rates the Fed pulls the rug out from underneath that train of thought. After more than 6 years of emergency monetary policy, which included QE1, QE2, QElite, QE3 – all under a zero interest rate policy – what is it that the Fed is fearing?

The USD took it on the chin (more on this later) as it appears the market has lost complete faith in the Fed. For example, let’s take a look at the Fed’s revised growth rate for 2015. It downgraded 2015 GDP to 1.8-2.0% from 2.3-2.7%, which had already been downgraded in March. Doing the math, Q1 came in at 0.7% and the Atlanta Fed GDP Now model has Q2 at 1.9%. Thus, to get to 2.7% for the year means that both Q3 and Q4 must come in at 4%. This may be a tall order, but if it happens then we should expect the Fed to raise interest rates.

Now for the USD, the reaction after the Fed announcement was swift and fast. The US dollar index is not on firm ground on the charts. The 50-day moving average has crossed the 100-day moving average, which is known as a death cross in technical analysis. As you can guess from the name this is not a positive development, as it indicates a bear market is on the horizon. The momentum indicators are also flagging.

On the fundamental side, the America’s trading partners are heading in the opposite direction. Japan has signaled that it no longer wants a weaker yen. The UK looks to have regained its legs after the Scottish referendum, the federal election, and a central bank that appears comfortable in raising interest rates in mid-2016. Europe looks like it has escaped deflation and is slowly on track for positive growth despite its problems with Greece. As for China, it is starting to exhibit some green shoots – just last week China’s business indicator reached its highest reading in a year at 53.5 from the 49.7 it registered in May.

Salvation to Catastrophe: What might happen to Greece

We found this excellent article on Bloomberg, which we thought is worth a read. You can find the Original article here

The Greek saga has haunted policy makers for more than five years. Now talks are deadlocked, banks are on life support and time is running out. With financial doomsday drawing ever closer in Athens, everyone from creditors and investors to depositors is increasingly focusing on what's next.
Some things are clear:

 Greece owes the International Monetary Fund about $1.7 billion this month.

 In July and August, the European Central Bank is due almost 6.8 billion euros ($7.6 billion).

 The euro-area backed bailout program expires on June 30, with creditors refusing to release up to 7.2 billion euros in remaining funds before Athens complies with belt-tightening conditions.

With time running out to close a deal, the German government has begun planning for a Greek default, according to Bild newspaper. If you're waiting for a clear resolution to the country's status in the 19-nation monetary union, you may wait a long time. Adopting the euro was always supposed to be a one-way ticket, so there is no legal precedent or political roadmap for an exit.
Next steps for Greece range from retaining the euro to catastrophic divorce. Half-measures are also on the cards, such as having multiple currencies circulate, with aid recycled to repay foreign-currency debts. Equally unclear is who would tell the world - and how - that Greece has entered an economic afterlife. Possible messengers include Greek Prime Minister Alexis Tsipras, European Central Bank President Mario Draghi, European Union President Donald Tusk and European Commission President Jean-Claude Juncker. There could be others.
We asked economists, investors and former policy makers what could happen next – and how it might unfold.

Scenario A – Grexit Avoided

Tsipras, whose Syriza party won January elections promising to undo the tough terms of the bailout loans, capitulates to creditor demands. Faced with a choice between effective expulsion from the euro area or implementing austerity in exchange for loans, Tsipras takes the cash. The ECB maintains its support of the financial system.
While aid flows, the government's days are numbered as its most hardline supporters mutiny. A new coalition is formed with backing from the pro-European opposition and Syriza's moderate flank – or elections are called. Greece's continued euro membership is ultimately secured as new loans are used to repay the ECB and the IMF and the country's coffers are replenished. Greece gets easier repayment terms on bailout loans. This helps tame the popular backlash against the new wave of fiscal measures. However, the cuts attached to the agreement suppress economic output, delaying Greece's recovery from the longest recession on record.

Scenario B – Hotel California

Greek Finance Minister Yanis Varoufakis has described euro membership by using a lyric from the famous 1976 Eagles song: “You can check out any time you like, but you can never leave.” Tsipras might fail to strike a compromise acceptable to the German government, Communist factions of his Syriza party, and stakeholders in between. Somehow, though, he manages to keep Greece officially in the euro.
Bailout loans – Greece's only source of funding – remain stalled. With Europe's political leaders unwilling to proceed, the ECB rations Emergency Liquidity Assistance, the lifeline keeping Greek banks afloat.
That requires the imposition of capital controls – as there isn't enough cash to meet demand – following a bank holiday. We're calling the two possible outcomes from here “somersault” and “check out.”
Scenario B1 – Somersault
Capital controls mean that limits are placed on withdrawals and transfers. The dramatic consequences force Tsipras to compromise. Opinion polls show that most Greeks – between two-thirds and three-quarters of the population – want to stay in the euro area “at any cost”. “You can check out any time you like, but you can never leave.”
Tsipras forges a new coalition with opposition lawmakers of pro-European parties. A referendum carried out amid capital controls and with banks shut, gives him a mandate to reverse course. A unity government is formed and Greece remains in the euro, but not before the disruption triggers a new recession.

Scenario B2 – Checking Out

With banks shut, the political situation deteriorates and a popular uprising intensifies, with Germany targeted as the country's main antagonist. Polls show a swing in favor of breaking from the euro area.
Capital controls give the government the space and time to print either a new currency or IOUs for domestic payments. The new scrip quickly plunges, reflecting the weak fundamentals of an economy that has shrunk by about a quarter since 2008.

Euro-area governments give Greece a “sweetener,” a parting-loan in hard currency. The rationale is to avert total economic collapse, which would create a failed state in a strategically critical region.
Greece’s debt to public entities is restructured, providing for the repayment of loans to the IMF, either through the euro area’s crisis fund or from the departure credit. Greece remains shut out of debt markets. Most Greek companies and banks default. Some bank deposits are seized to recapitalize a shattered financial system, or redenominated to the new legal tender equivalent. The sovereign debt
restructuring of 2012 has already ensured that the state won’t have to pay principal on most of itsexisting loans to private investors and the euro area for the next few years and until the economy stabilizes. Both the new paper and euros circulate. Greece may not officially leave the euro zone – the door is open to a return in good standing – though the country sputters in a financial purgatory.

Scenario C – ‘C’ for Catastrophe

Greece separates from the euro area in a messy default, amid demonstrations and deepening misery for most, with the government blaming everything on the Germans. No help is provided to support a new currency and to keep servicing bonds and IMF debt. That triggers cross-default clauses to all creditors. The government and banks collapse, meaning that years will be needed before a new structure emerges. Greece's economy plunges into a second depression. The blow from the biggest default in the history of capitalism drives Europe back into a recession and heaps pressure on vulnerable euro countries such as Italy.

Bad blood leads to Greece’s departure from the European Union. The idea that the euro is irreversible is thrown into question, rattling global markets. The economic implosion paves the way for extremists, from either the left or the far right, to take power. Those who can, flee the country. The tumult casts doubt on Greek membership in NATO. A new – and unstable – government turns to Russia for support, providing a Mediterranean outpost for Vladimir Putin.