China's stabilisation effort working, but Greek progress foundering on trust issue. Outcomes uncertain

By Raiko Shareef

Optimism around a Greek deal that had built up into week’s end has faded somewhat this morning, as euro-zone leaders are yet to formally agree on a path forward.

EUR opened 0.4% today, having gained 1.1% on Friday.

NZD suffered a rather rough spill below 0.67, but recovered to open just above that level this morning.

Euro-zone finance ministers, convening ahead of the leaders’ summit scheduled for Sunday night, failed to come to a complete agreement on the possible bailout package. They left the hardest issues for the leaders themselves, consistent with the idea that the decision to help keep Greece in the euro will be driven by politics, not economics.

Details of the (incomplete) proposal currently being discussed between the leaders’ has leaked, though. Amongst the most important facets: (1) Greece will need to legislate tax and pension reforms by 15 July, (2) Greece will need to privatise €50 bln worth of assets to help pay down its debt, and (3) the total bailout package is now seen somewhere between €82 bln and €86 bln, up from the previously reported €74 bln.

That the creditors are now demanding that Greece enacts key reforms in such a short time frame (i.e. by this Wednesday) speaks to the lack of trust between Europe and the Tsipras government. Otherwise, the proposal suggests that Greece takes a ‘time-out’ from the euro-zone, to get its house in order.

We will soon see whether Greece elects to swallow this particularly bitter pill, as a signal of good will. That would open the path to detailed negotiations about (necessary) debt reduction.

As it stands, there remains some uncertainty about whether Germany and the other hard-line creditors will accept the proposal put up by the finance ministers. That has contributed to the slightly risk-off start to the week.

NZD/USD shadowed the dip in EUR this morning, sitting just above 0.67. We expect NZD to remain sensitive to risk appetite, but continue to see potential for a strong squeeze higher in the event of a deal being struck.

China’s efforts to stem its equity market collapse appear to be working (for now), which will mean attention will remain focused on Europe.

In terms of scheduled releases, Fed Chair Yellen’s semi-annual testimony (Wed), China’s monthly data dump (Wed), and the NZ CPI release (Thu) will be on our radars.


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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.