Weekly Outlook: 2015, July 12 - 19

BNP Paribas - How To Trade Greece's End-Game

1. Sell EUR relief rallies against USD, GBP:

"This scenario produces a relief rally across most asset classes. European equities would rally and peripheral spreads would narrow. It is unlikely the EUR would appreciate broadly as it is difficult to argue that the single currency is trading at a discount to valuation. Outcome 1 would provide a catalyst for the re-establishment of EUR-funded carry trades," BNPP advises.

"Accordingly, the EUR should depreciate, especially against higher yielders such as the USD and GBP. A clear exception would be EURCHF, which is likely to rally in this scenario. The CHF has served as a safe-haven – as indicated by the net long exposure of +24.," BNPP projects.

2. Sell EUR/JPY:

"This is the scenario the market fears...We view that EURJPY shorts would perform even better in this scenario, as an anticipated delay to Fed tightening would weaken the USD," BNPP advises.

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Short-term evaluation:

• "Should Greece sign a deal, a short-term EUR rebound should be followed by EUR weakness as investors are likely to move back into EUR-funded carry positions."
• "Should Greece exit, the ECB may have to use its tool kit to keep sovereign spreads under control. Monetary easing should put the EUR under selling pressure. Ultimately, the ECB should be successful in controlling spreads, we believe."

Long-term evaluation:

• "A Grexit represents a fundamental shift for EMU with the loss of ‘irrevocability’ potentially turning the union into a club of fixed exchanges rates with the possibility to leave. Peripheral assets will have to trade at a risk premium, unless EMU authorities deepen integration via further banking union and fiscal integration steps. The ECB controlling sovereign spreads successfully could turn into a long-term EUR negative factor as it may not provide the necessary ‘wake-up call’ to European politicians to make the necessary reforms to avoid future market tension."

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EU Economic Summit, Inflation data in the UK and the US German Economic Sentiment, US Retail sales, Employment data from the UK and the US, Rate decision in Japan, the UK and Canada and Janet Yellen’s testimony are the main market movers on Forex calendar. Here is an outlook on the highlights of this week.

Last week the Federal Reserve released the minutes from its June meeting, showing policymakers were concerned about Greece’s debt crisis, saying failure to reach an agreement may result in disruptions in financial markets in the euro area and possibly ricochet into the US economy. The rate hike timeline was also discussed, as mixed economic data made it harder for the Fed to initiate such a move in June. Many members were determined to receive further solid data before deciding to raise rates.

1. EU Economic Summit: Sunday. Euro zone finance ministers will gather in Brussels for an emergency meeting to discuss Greece’s final proposal. Market volatility is expected.
2. Eurogroup meetings: Monday.Finance Ministers from euro area member states, will discuss issues concerning the Eurozon’s economic health and will focus on the Greek negotiations.
3. UK inflation data: Monday, 8:30. Britain’s inflation rebounded in May, after turning negative in the prior month. Official figures showed prices increased 0.1% amid higher airfare and oil prices. The reading was in line with market forecast. Analysts expect inflation will remain weak in the coming months and will stay below the BOE’s goal of 2% until 2017. However, low prices and rising wages are beneficiary to household finances. UK’s inflation is expected to rise by 0.1% in June.
4. Eurozone German ZEW Economic Sentiment: Monday, 9:00. German Economic Sentiment Index fell to 31.5 in June, following 41.9 posted in May. Analysts expected a higher reading of 37.5. The Current condition declined to 62.9 from 65.7 reported a month earlier. External factors as the Greek crisis were the main source of worry for German responders. Germany wishes to keep Greece on the euro zone to maintain the single currency, but there are other voices calling for a Grexit. Economics expect sentiment will deteriorate to 30.6.
5. US Retail Sales: Tuesday, 12:30. Americans increased their spending at retailers in May, buying more autos, clothes and building materials. Retail sales rose a seasonally adjusted 1.2% after a mere 0.2% advance in April, indicating the job market continues to improve increasing store sales. The reading was broadly in line with market forecast. Over the past 12 months, sales have gained 2.7%. Excluding automobiles, core retail rose a solid 1% in May while economists forecasted a 0.7% rise. If this trend continues, the Federal Reserve may raise rates in the near future. Retail sales is expected to rise 0.4%, while Core sales are forecasted to advance 0.7%.
6. Japan rate decision: Wednesday. The Bank of Japan kept its monetary policy in tact in its June meeting. The central bank will continue to expand the monetary base at an annual pace of 80 trillion yen and increase the frequency of its economic outlook reports to improve transparency. The recent slowdown in exports poses risks to economic growth, but Kuroda said that inflation remains on track with accordance to the BOJ’s target. The central bank chief reiterated that Japanese economy is recovering moderately.
7. UK employment data: Wednesday, 8:30. The number of Britons claiming unemployment benefits declined by 6,500 in May after contracting 7,800 in the previous month. Economists forecasted a bigger decline of minus 12,500. The unemployment rate remained at a seven-year low of 5.5% and wages increased at the fastest rate in four years. The number of unemployed fell 43,000 in the three months to April indicating UK’s labor market continues to improve. The number of unemployed in the UK is expected to decline by 9,300 in June.
8. US PPI: Wednesday, 12:30. U.S. Producer Price Index edged up 0.5% in May, compared to minus 0.4% in April. Analysts expected a 0.4% rise. On an annual basis, headline inflation fell 1.1%. May’s rise resulted from a broad-based increase in energy prices. Analysts expect that higher pipeline inflation pressures could induce the Federal Reserve to hike rates in September. Producer Prices are expected to rise 0.2% this time.
9. Canadian rate decision: Wednesday, 14:00. The Bank of Canada maintained its interest rate at 0.75%. The central Bank noted that inflation was in line with projections and consumer spending remains strong, but monetary policy will be re-examined in the coming months. Bank of Canada governor Stephen Poloz ascribes Canadian expansion to US economic growth, saying a strengthening American economy will provide a major boost for Canada.
10. Janet Yellen testifies: Wednesday, 14:00. Federal Reserve Chair Janet Yellen will testify before the House Financial Services Committee, in Washington DC, on the Semiannual Monetary Policy Report. Yellen may speak about the reasons for the Fed’s decision to postpone the rate raise in June, and suggest a possible timeline for the first hike. The U.S. economy expanded a solid 2.4% in 2014, but the Fed’s latest prediction for 2015 shows weaker growth of 1.8% to 2%.
11. Eurozone rate decision: Thursday, 11:45. The ECB maintained its monetary policy unchanged in its June meeting. Mario Draghi noted the monetary stimulus is filtering through to the economy as forecasted and the European Central Bank needs continue the bond-buying plan through to the finish. The ECB forecasts a pickup in growth and inflation in the next three years. The stimulus is also expected to boost domestic demand and raise economic activity. The outlook remained broadly unchanged.
12. US Unemployment Claims: Thursday, 12:30. The number of initial claims for unemployment benefits in the U.S. edged up 15,000 last week, reaching an adjusted 297,000. The reading was much higher than the 274,000 claims forecasted by analysts. The four-week moving average increased by 4,500 claims to 275,000. Continuing claims, rose by 69,000 claims to a seasonally adjusted 2.33 million. The unexpected rise can be attributed to layoffs in the auto industry. The number of claims is expected to reach 282,000 this week.
13. US Philly Fed Manufacturing Index: Thursday, 14:00. Manufacturing conditions in the Philadelphia region have improved in June, rising from 6.7 in May to 15.2 in June. Analysts expected a modest rise to 8.1 points. The increase was across the board. New orders climbed to 15.2 in June from 4.0 in May. Paid sub index surged to 17.2 from minus 14.2 in May. However, the employment index fell to 3.8 from 6.7. The reading suggests higher growth in the second half of 2015. Manufacturing activity is expected to decline to12.1 this time.
14. US Building Permits: Friday, 12:30. U.S. building permits for home construction surged 11.8% in May to a seasonally adjusted annual pace of 1.28 million units. The nearly eight-year high reading suggests a positive trend in the housing sector as well as improvement in the broader economy. Policymakers viewed the housing sector as one of the weak spots in the US economy. More solid data came from retail sales and employment indicating the first-quarter’s soft patch is over. U.S. building permits is expected to reachv1.11 million in June.
15. US inflation data: Friday, 12:30. U.S. consumer prices increased 0.4% in May, registering the largest increase in more than two years, amid rising gasoline prices. The rise marks the end of the oil crisis and the sluggish first quarter. The fed estimates inflation will rise over the summer enabling a rate hike in September. Meanwhile, core CPI excluding food and energy costs, inched 0.1%, the smallest gain in five months, after a 0.3% rise in April. On a yearly base, core CPI rose 1.7%, slowing from a yearly increase of 1.8% in April. CPI is expected to gain 0.3%, while core CPI is predicted to grow by 0.2%.
16. US Prelim UoM Consumer Sentiment: Friday, 14:00. Consumer confidence jumped to 94.6 in May from 90.7 in April. Economists expected the index to advance to 91.2 in June. The rise in confidence was due to solid data released from the job market and consumer spending surged after wages grew and inflation remained low. Consumer confidence is expected to reach 96.7 in June.

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US Dollar Looks to Volatility, Euro, Yellen to Forge Break
The Dollar may have closed the past week with a gain, but it certainly wasn’t showing the kind of bullish conviction that would project a lasting move. Indecision is likely to give way to a decisive move in the week ahead.

Australian Dollar Eyes Greece, Yellen Testimony for Direction Cues
The Australian Dollar is looking to last-ditch Greek debt deal negotiations and testimony from Fed Chair Janet Yellen for direction clues.

GBP to Face Larger Advance on Hawkish BoE, Stronger UK Wage Growth
The narrowing risk for a Euro-Zone breakup paired with signs of a stronger U.K. recovery should heighten the appeal of the British Pound

Gold Flirts with Breakdown Support – Outlook Mired by Macro Concerns
Gold prices plummeted this week with the precious metal down 2.2% to trade at 1174 ahead of the New York close on Friday

Japanese Yen Reverses Sharply, but Rally May not be Over Yet
The Japanese Yen finished the week nearly unchanged as an early-week surge gave way to similarly dramatic late week reversal




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