Dollar Firmer, but Vulnerable

The US dollar, which traded heavily throughout last week, turned better bid today.  However, with no significant data, and the renewed pressure on European bonds, the greenback's firmer tone looks fragile.  

Core European bond yields are 3-4 bp higher, including German bunds.  Peripheral bonds yields are up 8-11 bp, with Greek 10-year yields up 25 bp.  

The high flying Antipodean currencies have also seen some profit-taking today.  The Deputy Governor of the Reserve Bank of Australia talked down the Aussie, but also explicitly indicated that the rate lever has not been exhausted.  The Aussie slipped through the pre-weekend low just below $0.8000.  There is a large option struck there that expires today. 

Meanwhile a new property tax in New Zealand to cool the market has taken a toll on the Kiwi. With today's losses,  it has shed two percent since reaching almost $0.7565 last Thursday. Speculation is mounting for an RBNZ rate cut as early as next month.  The use of macro-prudential policy to curb the property market may be aimed at mitigate the impact of a rate cut on an over-heating sector.  

The US dollar has traded higher against the yen but has remains below JPY120.  A combination disappointing Japanese data and higher Treasury yields are doing the trick.  Japan revised down March industrial production to -0.8% from the initial estimate of -0.3%.  The March tertiary sector contracted by 1%.  The consensus had expected a 0.5% fall.  Both reports warn of the risk that tomorrow's Q1 GDP estimate may disappoint the consensus 0.4% quarter-over-quarter expansion. The Nikkei closed above its 20-day moving average (~19763)for the first time here in May and has moved into the gap created by the sharply lower opening on April 30.  The top of the gap comes in near 20032.

In Europe, the focus remains on Greece.  A letter from the Greek government to the IMF ahead of last week's repayment warned that it would not be able to make it has been leaked.   On one hand, the fact that it made the payment illustrates the Greek government's "game" of "crying wolf".  Many times over the last few months, the Greek government has said it is out of funds only to find them.  It is partly a ploy to put more pressure on the creditors.  

On the other hand, if necessity is indeed the mother of invention, the creativity of the Greek government has limits.  To make last week's payment it had to tap into a reserve fund at the IMF, which it needs to replace in the coming weeks or face new repercussions.   In a bizarre twist, if it were to get a small aid tranche, replenishing its reserves at the IMF would become a new priority.  

ECB's Mersch appeared to speak for many when he suggested the end game was at hand.  The current situation is no tenable.  There is a growing concern that Greek banks are running out of collateral. There may be some effort to collateralize new assets, but it is not clear whether such a course would be acceptable to the ECB.  The ECB meets later this week in a non-policy meeting.  It could review the discount (haircut) applied to Greek government bonds used for collateral.  It would also review Greece's ELA cap. 

Greek Prime Minister Tsipras was quoted suggesting "A deal must be reached, but it must be mutually beneficial."  In this brief and seemingly obvious statement lies the crux of the matter. From Greece creditors' vantage point, it does not need to be "mutually beneficial".  Greece's benefits were enjoyed previously when Greece borrowed funds and lived beyond its means.  Now it is the creditors' turn to benefit through being repaid with interest.  

At the same time, whatever aid Greece is to get goes to servicing the debt largely in official hands.  Very little of that aid money would stay in Greece.  The official creditors in effect are willing to cut their proverbial nose despite their face.  Alternatively, to mix metaphors, they are willing to shoot themselves in the foot to "teach" Greece (and others) a lesson.   Greece has become a middleman to recycle the funds from the official creditors back to themselves.  

The euro posted an outside up day before the weekend but has trading within that pre-weekend range today.  Initial support is seen in the $1.1350 area.  On the top side, the $1.1470 area was approached at the end of last week, and resistance is seen in the $1.1500-30 area.  Sterling's weak close before the weekend spurred additional sales today but support near $1.5650 held. Although we have suggested potential toward $1.5880, we see increasing talk of a $1.60 objective.