The Fed lift-off and Greece remain the two most important triggers of FX volatility. At the same time currency wars seem to dampen FX fluctuations. After a round of dovish central bank meetings in recent days, most notably the June FOMC gathering, FX markets seem to be entering a consolidation period that could dampen FX volatility.
The Greek issue remains, however, and our expectations of a deal at this week’s Eurogroup meeting were proved premature. Importantly, the impasse is not causing market panic as investors seem to be willing to wait until 30 June when the extended bailout expires and the bundled IMF payments are due.
The above said, European markets could start panicking if the deadlock persists after the EU summit on Monday. EUR seems to be holding firm for now but could come under sustained downside pressure if fears of a Greek default and capital controls were to escalate next week. It remains to be seen whether the Greek tragedy will remain a EUR-centric development or trigger global risk aversion. While this remains an important risk, it seems, at least for now, as though dovish global central banks and ample liquidity could help prevent a disaster scenario.
Elsewhere, with USD off its highs, commodity prices could continue to recover and boost the performance of commodity currencies. Next to weaker USD, oil prices should be supported by positive seasonality effects. Recovering commodity prices should eventually support inflation expectations and re-fuel Fed rate hike expectations. The combination of a Fed lift-off, growing inflation expectations and falling central bank FX reserves could trigger a lift-off tantrum later this year.
What we’re watching:
EUR: PMIs in focus – unless next week’s business activity data surprises considerably higher, medium-term inflation expectations are likely to remain capped to the detriment of ECB rate expectations.
NZD: Trade balance drag to return – even if the trade balance were to return to a deficit in May, we expect only limited NZD downside risk.
GBP: An unlikely safe-haven, still – in the absence of any major data releases the GBP is likely to be driven by external factors such as risk sentiment. Vols may rise furth
