Investors did not like that a Grexit is still on the table

Monday's 1.3% slide in the EUR/USD tells us that investors were neither encouraged nor impressed by the deal that European creditors offered Greece. First and foremost, Prime Minister Tsipras still needs to rally support in Parliament to pass a number of reforms that were rejected at the referendum. The deadline is July 15. This includes a higher value added tax, spending cuts and pension reforms. While it would be easy to attribute part of the decline in the euro to the possibility of Parliament rejecting some of the more stringent terms, at this stage of the game we believe that the Greek government has no choice but to accept the deal on the table. Nonetheless, members of the Syriza party already seem to be moaning and groaning about the program. Approving the reforms also does not guarantee aid. It is only a necessary step to "opening" new debt negotiation. If all goes well, Greece will receive 7 billion euros in immediate financing to meet their July 20 debt payment to the ECB and another 5 billions in August to pay the IMF. In total, they could receive as much as 86 billion euros in aid but would need to create a 50 billion euro privatization fund. As late as Monday morning, the leaders of Greece and Germany were ready to walk out of the room and while an agreement was eventually made, it is a difficult one for everyone to swallow, which suggests that the talks could still break down in the second round of negotiations, especially if only part of the reforms are accepted by the Greek Parliament.

Investors did not like that a Grexit is still on the table if Parliament votes 'no'. The risk is far less now than i was a week ago but the fact that it is not eliminated puts pressure on the euro. Furthermore, relationships within the Eurozone have been strained as a result of these negotiations with the ECB President Draghi and German Finance Minister Schaeuble coming to head. The Greek crisis has hurt Greece and all of Europe. Investors were also disappointed that the ECB did not increase emergency lending for Greek banks, which would have paved the way for their re-opening this week. However, the central bank decided to leave lending unchanged and in response the Greek government said banks would remain closed until at least Wednesday. Expect Greece to be a main topic at this week's ECB meeting and one that will keep the central bank head dovish. The German ZEW survey is scheduled for release on Tuesday and we are looking for investor confidence to be hit hard by the Greek crisis. This means EUR/USD could make a run for its July low of 1.0916.

U.S. Dollar: Biggest Winner of Greek Deal

The U.S. dollar traded higher against all of the major currencies Monday, making it the biggest winner of the Greek debt deal. The questions raised by the agreement make the lack of uncertainty and economic stability of the U.S. extremely attractive. The 50 state economic union is rock solid. In contrast, the Greek debt crisis exposes the widening economic and political divide in Europe. Based on these developments, it's no wonder that investors have piled into the U.S. dollar. Retail sales are scheduled for release on Tuesday but the main focus this week will be Janet Yellen's semiannual testimony on the economy and monetary policy. Last week, she reinforced her view that rates will rise this year and the buzz in the market on Monday was that her confidence will be reinforced with the Greek deal. However, we are not so sure that she will satisfy dollar bulls this week. Rates are rising but tightening in December appears more likely than September. Under the grilling of Congress, Yellen may sound noncommittal and this tone could end up disappointing dollar bulls, especially after the strong rise in the currency. Economists are also looking for a slowdown in retail-sales growth so we would not be surprised if the rally in USD/JPY met resistance near 124.50.

CAD Slips on Lower Oil, Iran Deal Prospects

All three commodity currencies traded lower on Monday with the Canadian dollar leading the losses. While the rise in the greenback drove commodity prices lower, oil also declined on the prospect of a historic nuclear deal for Iran. If Tehran agrees to curb its nuclear program, sanctions on Iranian oil production and exports could be loosened, increasing the supply on the market. The Canadian dollar is in play this week with the Bank of Canada meeting on monetary policy. There's a strong chance of dovish comments from the central bank and a small but realistic chance of a 25bp rate cut. USD/CAD is hovering near 6-year highs and a surprise rate cut could drive it to 1.30. The big story overnight was China's trade balance. A smaller-than-expected trade surplus was reported but a larger increase in exports and smaller decline in imports helped to ease the sting and lifted the Australian dollar. Better-than-expected data could be part of the Chinese government's attempts to stabilize the equity market. It will be interesting to see how this week's Chinese retail sales and industrial production reports fare. Meanwhile there are a number of NZD-centric event risks this week that could affect how the currency trades including consumer prices and the global dairy trade auction on Wednesday.

GBP: Inflation Data on Tap

Sterling traded lower against the U.S. dollar but rose strongly against all of other major currencies with its best performance against the euro. No U.K. economic reports were scheduled for release and the U.K. economy or financial sector is not heavily exposed to Greece. This leaves sterling to trade on this week's key economic reports including Tuesday's consumer and producer price releases along with Wednesday's employment report. While the U.K. economy faces its own challenges, we don't expect these economic reports to have a significant impact on the currency.
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