MARKETS: USD vulnerable, Greece in the headlines for wrong reasons

The markets allowed themselves to become far too carried away with US economic data and by doing so, they also became too ambitious with US interest rate expectations. The Fed was never going to be in a hurry to raise interest rates, or even allow to be pressured into raising rates either. Outside of consistently strong job reports, there is far more room for improvement in the US economy before the Fed can move onto the next stage in normalising monetary policy. The USD will be exposed to greater risks this Wednesday if the FOMC minutes release express any hint that the Fed might swerve away from its repeated commitment to begin raising interest rates this year. This is the strongest downside risk facing the USD, and knowing that the Federal Reserve’s mandate is job creation and inflation, and not growth, I still maintain that we are on track for a September rate rise.
Greece is continuing to remain a headline attraction and unfortunately for the wrong reasons. If it wasn’t worrisome enough for investors that the Greek economy has allowed itself to slip back into a recession, then the reports that it only avoided a potential default to the IMF by using an emergency reserves account from the IMF, to repay the IMF, will send sentiment to new lows. The bottom line is that these five-month negotiations have dragged on for too long, whilst also largely failing to present anything tangible at all. The situation needs to come to a conclusion, and the only likely conclusion at this point is that PM Alexis Tsipras will have to back down.
The Greek economy has basically allowed itself to be exposed to another recession, as these reoccurring negotiations have heavily dragged on investor sentiment and presented their own economic risks. While all attention has been focused on the prolonged negotiations between Greece and its creditors, economic data has taken a large step back since political uncertainty re-emerged late last year. Due to the continual uncertainty with failing negotiations, investment in Greece has been put at risk and consumers have held back from spending. As long as the negotiations continue, the Greek economy will continue to suffer and this could be another lengthy recession.

INDICES
European futures are pointing to the upside with this not just suggesting a more positive sentiment from investors, but also that investors themselves are largely ignoring the ongoing Greek risks. A positive start might be that European indices are trying to recover losses following the aggressive sell-off in global bonds a week ago. That being said, it is also possible that a more recently upbeat Mario Draghi is contributing towards higher sentiment because the ECB President is talking more positively about the EU economy as of late. There did seem to be a sense of surprise that Draghi insisted once again last Thursday that the QE programme will run in full, with this speculation confusing in itself when you consider that investors demanded QE from the ECB for one year before they pulled the trigger. Anyway, the ECB maintaining its loose stimulus programme will basically mean European futures will remain attractive to investors.
Asked what indices I would say are at risk to vulnerability, I wouldn’t hesitate to suggest the US markets. While the Fed leaving rates unchanged for a longer period of time does mean that capital is easier for investors to reach, traders completely over-hyped how the US economy was progressing. Outside of job creation there is still lots of room for improvement in the US economy, meaning that the pace of interest rate rises will probably be agonisingly slow. What do I think is the weakest aspect of the US economy? Consumer spending. It just makes no sense that despite consistently strong job creation and consumer confidence readings touching milestone highs, consumers remain reluctant to spend. Consumers were not even spending before sentiment readings began to slip lower, and the Fed will surely be monitoring this closely over the upcoming months.
The Shanghai Composite is one of the few indices to trade lower to begin the week, with this likely linked to signs of weaknesses remaining in the Chinese property sector. Although month-on-month prices were flat, the downturn in the property sector is one contributing factor behind reduced domestic economic momentum. As regards the Shanghai Composite still trading lower despite month-on-month prices being flat, any signs of the China economy stabilising will limit pressure on the People’s Bank of China (PBoC) to continue easing monetary policy.

CURRENCY MARKETS
After being heavily punished over the past week, the USD is trying to commence the week more positively and is currently trading higher against its major trading partners. There is growing optimism among investors that the FOMC Minutes will at the very least repeat the Fed intentions to begin raising rates later this year, which would prevent the USD from further vulnerability. Emerging market currencies are benefiting the most from the Fed hesitations, and further indications that the pace of monetary tightening will be slow, mainly because these economies will become less concerned over sudden capital outflows.
After setting a three-month high at 1.1466, the EURUSD is pulling back from a possible over-extension. The Greece risks remain ever-present and traders might be using this continual downside risk to close positions. Although the unexpected advance away from the 12-year low at 1.04 has surprised most, the major reason for the progression has been USD weakness. While the EU economic outlook is improving, EURUSD gains are still seen in many ways limited to USD vulnerability.
Ahead of Tuesday’s high-risk inflation data, the GBPUSD has declined by nearly 100 pips from 1.5745 to 1.5651. The Bank of England (BoE) is notoriously dovish when it comes to UK inflation and Governor Mark Carney repeated his inflation concerns during the recent BoE Inflation Report. Another weak inflation reading will further push back any UK interest rate expectations, with this in turn preventing investor attraction towards the GBP.

COMMODITIES
Gold continues to enjoy fresh three-month highs above $1230 with appetite towards the Yellow metal increasing as bets narrow down that the Fed could even contemplate the idea that it might raise interest rates in June. I expect the Gold market to be volatile this week, with the FOMC Minutes presenting an opportunity for more movements in the commodity market. I think that the Fed will look to delete concerns that it might not raise interest rates this year and this could encourage some profit-taking here. In the mid-term, the central bank will not allow itself to be pressured into raising interest rates and Gold appetite will increase as the USD continues to be vulnerable to further profit-taking. WTI Oil is consolidating around $60 and might be setting itself a new trading range below the 2015 high at $62. While we are now encountering a correlation between declining oil rigs and reduced trade surpluses, there is still an aggressive oversupply in the markets and I remain apprehensive towards suggesting that the price can extend any higher than $62 to be honest. This would require substantially reduced concerns around the aggressive oversupply and this will remain a theme for some time yet.
I am also keeping a close eye on the reports last week that Saudi Arabia and the United Arab Emirates are increasing production despite the price of WTI being so low, with it being possible that OPEC is trying to increase its market share and squeeze US producers out of the markets.
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