How We're Trading Euros After The EU Meetings

• How We're Trading Euros After The EU Meetings
• Dollar Ends the Week Strong Thanks to Yellen
• AUD Traders Beware, Big Week for Chinese Data
• CAD: Employment Report Surprises to the Upside
• NZD Gives Up Earlier Gains on USD Strength
• GBP Extends Recovery on Stronger Trade

 How We're Trading Euros After The EU Meetings

This weekend is another opportunity for Greece and the Eurogroup to hold the market hostage and leave investors in limbo. Hopefully you have flattened your positions ahead of the Eurogroup meeting on Saturday and Sunday because even though the Greek government submitted a proposal late Thursday that is much closer to version that the EU Commission prepared June 26, there still appears to be resistance especially from the Germans who do not want to write down any debt. So while the chance of a deal is the highest this year, the intraday pullback in the EUR/USD reflects the market's fear that Germany, the most powerful country in the Eurozone could still block a deal.  We still believe that a deal will be done but being exposed to euros ahead of these meetings is risky and we took profits on all of our positions before the weekend was out.

If you've done the same, the only option is to wait for the outcome of the negotiations and ride the move in the days that follow.  A deal or no deal will mean a multi-day move in currencies.  On Friday, we saw how the possibility of a deal lifted the EUR/USD, USD/JPY and other risk currencies.  If an agreement is officially announced, it should send EUR/USD firmly above 1.12 and USD/JPY to 124.  But the biggest reaction will be to a breakdown in the talks.  Failing to reach a deal would mean a Grexit and you can bet that there will be a messy response as a result.  In such scenario, traders should expect volatility to spike, the euro to fall quickly and the yen to rise.  The uncertainty and risk aversion created by this outcome would take other major currencies and global equities sharply lower as well.  Either way, whatever the outcome there will be follow through and we'll be riding that move in next week's trades. The only unclear possibility would be if the decision on aid gets delayed and we're stuck with another week of Grexit / No Grexit talks which will translate into more consolidation for the euro with a bias to the downside.  With the German ZEW survey being the most important piece of Eurozone data scheduled for release next week, Greece will dominate euro trade.

Dollar Ends the Week Strong Thanks to Yellen

Thanks to Fed Chair Janet Yellen, the U.S. dollar is back in demand.  Despite the uncertainty in Greece, Yellen sounded fairly optimistic, saying that liftoff is appropriate sometime this year. Although job growth is still below pre-recession levels, the head of the U.S. central bank is encouraged by "tentative hints of a pickup in the pace of wage gains." She also said that the euro area is recovering which suggests that without Greek uncertainty, rates would rise in September but now she is in wait and see mode because in many ways, a rate hike is as much Greek dependent as data dependent. Fed President Rosengren also believes that rates will rise this year but he is not a voting member of the FOMC in 2015. Yet the dollar is responding well because Yellen reminded investors of the currency's growth and yield advantage.  Tightening could be delayed until December but it is happening this year and that makes the greenback more attractive than many other currencies. Yellen also gave investors a good sense of the optimistic tone that she will adopt at next week's semiannual testimony on the economy and monetary policy.   Between these speeches and the U.S. retail sales report, the outlook for U.S. policy will also play a role in next week's trade.  We are bullish dollars and believe that rates will rise in 2015 and while Yellen was hawkish, she will probably sound more noncommittal on Capitol Hill, which could lead to a pullback in USD/JPY that we will view as opportunity to buy dollars at a lower level.

AUD Traders Beware, Big Week for Chinese Data

For the second day in a row, Chinese stocks rebounded strongly giving investors hope that the worst is over.  However this strength did not translate into gains for the Australian, Canadian and New Zealand dollars.  A large part of this had to do with broad based U.S. dollar strength but investors are also worried about next week's key Chinese economic reports. The weekend starts with China's trade balance and on Wednesday we have retail sales, industrial production and second quarter GDP numbers scheduled for release. The initial top in Chinese stocks was caused by concerns about growth and unfortunately these economic reports could reinforce everyone's fears, renewing the slide in equities. If stocks fall once again, the Chinese government may have to come back with a fresh response.  However one other idea to consider is that the Chinese government could encourage stocks to extend their gains by massaging the data. Regardless of the outcome, we believe that AUD and NZD are vulnerable to additional losses.  Meanwhile the rally in the Canadian dollar after today's better than expect employment reports was shortlived. Canada lost 6400 jobs in the month of June, which was less than economists had anticipated. All of the jobs lost were part time with full time jobs rising by more than 64k. The unemployment rate also held steady at 6.8% against expectations for a rise to 6.9%. By all counts this was a healthy report but we do not believe that it alters the possibility of dovish comments from the Bank of Canada next week following the sharp slowdown in manufacturing activity, decline in GDP growth and drop in oil prices.

GBP Extends Recovery on Stronger Trade

Better than expected U.K. trade numbers helped sterling extend its recovery against the greenback. The country's trade deficit narrowed to its smallest level in 2 years on falling imports.  Exports also declined but by a much smaller amount.  Today's report will contribute positively to second quarter GDP growth. This past week, the focus was very much off the British pound and while there are a few important pieces of U.K. data scheduled for release next week, Greece, China and Fed policy will dominate EUR/GBP and GBP/USD flows. U.K. inflation and employment reports are important but what we are really interested in is Bank of England Governor Carney's speech towards the end of the week.  Rates are not expected to rise until 2016 but expectations around that timing could still influence sterling trade.