China’s equities rout hits the Aussie. Greek 'no' vote sets up uncertainty and protracted negotiation for the euro. Risks rise all round

By Raiko Shareef

EUR/USD opened 1.0% lower this morning, thanks to a clear victory to Greece’s ‘No’ camp.

On Friday, the AUD was by far the biggest loser, with investors no doubt leery of the impact of China’s equities rout.

The Greek populace has voted to reject the negotiating terms set out by European creditors two weeks ago, handing a strong victory to the Tsipras government. The ‘No’ camp gained 61%, a much more decisive result than the dead heat suggested by pre-referendum polls.

In effect, the result sharply raises the prospect of an eventual Greek exit from the euro-zone. Tsipras and his government have been handed a mandate from the Greek people to seek better terms in what will now be called a third bailout package (as opposed to an extension of the second). Clearly, European leaders will not take this lightly. They have little incentive to improve the deal, for fear of encouraging embattled European nations to use similar tactics in the future.

The near-term path is not very clear, with an official response from Europe unlikely before the European session. The first pressure point being scrutinised is the emergency credit line from the ECB to Greek banks. The ECB will likely keep this open until it gets clarity from political leaders. In any case, markets are in for a period of uncertainty and protracted negotiation. Risk assets (NZD and AUD among them) will suffer.

As this note goes to print, EUR/USD sits 1.0% lower at 1.0990, and AUD/USD is 0.7% weaker at 0.7470. NZD/USD has held up surprisingly well, only 0.4% lower at 0.6670. We might have expected a worse performance, given NZD’s historical relationship with risk appetite. But the scale of NZD’s decline over the past month (as well as the heavily short market) may provide some relative support. Still, risk appetite should continue to provide direction for NZD, even if it does not match the scale.

While Greece will remain the focus of attention today, investors will also be paying some mind to market movements in China.

On Saturday, the Chinese authorities announced that the top 21 brokerage firms were to form an RMB120bn (~$19bn) fund to support blue-chip stocks. This looks like a pittance against the $3.2 tln of value that has been erased from the Shanghai Composite in the past three weeks.

In terms of scheduled releases (which will take a back seat this week), we eye the FOMC’s June minutes (Wed) and Fed Chair Yellen’s speech (Fr) as highlights. Closer to home, the RBA’s policy decision (Tue) and the AU labour market report (Thu) will be worth a scan.


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Daily exchange rates

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Raiko Shareef is on the BNZ Research team. All its research is available here.