Currency markets are likely to remain pre-occupied with Greece crisis fears in the day ahead, eyeing a meeting of G7 policymakers for direction.
US Dollar Rally Probably Owed to Risk Aversion, Not Upbeat Economic Data
Greece Crisis Fears in the Spotlight as Traders Focus on Dresden G7 Summit
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The US Dollar edged narrowly lower in overnight trade as prices digested following yesterday’s breakneck advance. While a wide spectrum of commentary attributed the move to an upbeat batch of US economic data, another catalyst was probably at work. Indeed, the greenback began yesterday’s advance hours before April’s Durable Goods report – the day’s first bit of scheduled event risk – came across the wires.
Rather, the US unit rallied alongside German Bund prices as European bond markets came online. Tellingly, Greece’s benchmark 10-year government bond yield advanced in tandem. This suggests the US Dollar’s advance was probably reflective of haven demand amid Greece-inspired risk aversion rather than anything on the domestic front.
In fact, Fed funds futures finished the day broadly unchanged from Friday’s close. Had US news-flow inspired the rally, the priced-in outlook would probably show an up-shift in the expected timeline for the first post-QE FOMC rate hike. The magnitude of volatility may have reflected returning liquidity as several key markets returned from the long weekend (the US, UK, Germany and Hong Kong were offline Monday).
Renewed fears followed comments from Greek Interior Minister Nikos Voutsis, who told local TV station Mega that Athens will not make June’s payment to the IMF because the money “isn’t there to be given”. This was followed by ominous comments from ESM head Klaus Regling yesterday, who hinted that a missed payment to the IMF would impact the likelihood of a deal with EU lenders and potentially herald insolvency.
Looking ahead, a quiet economic calendar in European and US trading hours is likely to keep this narrative at the forefront, particularly as G7 finance ministers and central bank chiefs begin a three-day meeting in Dresden. Greece is likely to feature prominently in the discussions, and traders will keep a close eye on headlines emerging from the sit-down for direction cues.
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