Stocks are higher in Europe and the US after the announcement of the agreement to bail out Greece late yesterday afternoon and the continued rally in Shanghai, which has now stretched to three days, buoyed investors.
Key to the price action is a sense that traders and investors can trade once again without being blindsided by unexpected events and grey swans.
What’s good for stocks isn’t necessarily good for the Aussie dollar, or the euro, because as fear diminishes, so the expectation that the US Federal Reserve Board will have clear air to start its tightening cycle in September returns.
That’s not to say that fed governors and regional presidents weren’t consistently saying over the past two weeks that rates are still likely to rise sometime soon. It was just that the market believed Shanghai stock turmoil and a high potential for Grexit would tie their hands and forestall the first tightening.
Nick Parsons, NAB’s UK based co-head of FX Strategy, said overnight in a note to clients that: “There is probably enough calm and relief in risk assets globally to keep a Fed tightening very much a live subject for the September 17th FOMC meeting.”
So, with Janet Yellen giving her semi-annual testimony to Congress on Wednesday and given that on Friday she said, “I expect it will be appropriate at some point later this year to take the first step to raise the federal funds rate and thus begin normalizing monetary policy”, traders renewed their focus on the likely path of US interest rates.
That’s expected to support the US dollar and traders are back in buying.
Last night the Aussie dollar traded down to a low of 0.7380 while the euro slipped back below 1.10. They are only marginally stronger now and it seems that the pressure is growing for US dollar strength and Aussie dollar weakness.
Increasingly, Aussie dollar forecasts are being downgraded as expectations of higher US rates, a weaker Chinese economy and Australia’s own economic headwinds combine to see buyers exit the market and seller take the ascendancy.
That’s good news for the economy as a whole. As RBA governor said in his statement after the board’s decision to hold interest rates at 2%:
“Further depreciation seems both likely and necessary, particularly given the significant declines in key commodity prices.”