Yesterday’s rout in the German bund market and the associated short squeeze in the euro have abated for the time being, allowing the greenback to claw back some of the losses witnessed yesterday in the aftermath of rumors an 11th-hour deal was in the works between Greece and its creditors. As it currently stands a deal must be struck within the next 48 hours or Greece will not be able to make its June 5th payment that is due to the IMF, and although both sides have drafted proposals, it still appears as if the Troika and Greece have a ways to come before both agreeing to a deal. Greek PM Alexis Tsipras will be meeting with European Commission President Juncker to discuss the offer Greece submitted on Monday evening, though the outcome will likely not be monumental as we suspect the proposal penned by the Troika will be the tender the Greek counteroffer stems from. It is unlikely the volatile conditions for the euro subside as we move into the latter half of the week, with the common-currency to take its cues from Greek headlines and the important US jobs report on Friday.
The nearing of the Greek endgame has taken some of the spotlight away from the ECB rate decision this morning, which as expected, decided to keep monetary policy unchanged. The interesting developments on the monetary policy landscape in Europe, if any, will unfold during Mario Draghi’s press conference, though we would expect the resulting question and answer period to reconfirm market expectations. The economic data from the common-currency zone has been improving as of late, with Composite PMI data for May coming in today better than expected, not to mention the optimistic progression of private sector loan growth, M3 money supply, and consumer prices. That being said, the external tailwinds that have helped bolster the recent string of stronger domestic data (lower euro, lower oil prices, lower interest rates) have partially reversed, so it is likely Draghi echoes caution as to the progress of the recovery and telegraphs that to speak of an early exit from QE would be premature. In addition, it is also likely that Draghi fields some questions over earlier statements from board member Coeure, and the logistics surrounding the front-loading and dynamic tapering of QE purchases given supply and demand factors. Given the recent volatility in the European fixed income market we would assume Draghi will reiterate the ECB’s commitment to a smooth and orderly downward trajectory of interest rates, hoping to calm market worries and reduce some of the nauseating volatility experienced of late. The euro has given back a portion of yesterday’s gains against the greenback, but is holding relatively stable as Draghi takes the podium ahead of the North American open.
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