Greece's long term financial future still up in the air; Chinese stock market helped by suspending trading in certain company shares; USD benefits from uncertainty

By Ian Dobbs*:

The announcement in the past 24 hours that a deal has been reached between Greece and its creditors will be a relief to many market participants.

It certainly won’t be of much comfort to Greece however, as it falls well short of securing Greece’s long term financial future.

In fact it’s hard to see how the outcome of this bailout will be any more successful than the last two. Unfortunately we have more deadlines to look forward to with the first been Wednesday night.

Greece’s parliament must pass critical reform measures by that time to keep the agreement on track.

China too, seems to have contained its stock market collapse for now at least, albeit mostly because trading in many stocks is still suspended. The initial impact of these recent developments has been a return of risk appetite to the market.

That has benefited the USD more than anything as many now see the potential barriers to a Fed tightening this year as diminished.

The timing of any rate hike is still very much up in there air, with September somewhat less likely than December at this stage.

Major Announcements last week:

  • NZIER Business Confidence 5 vs 23 previous
  • RBA leave Monetary policy unchanged
  • UK Manufacturing +.6% vs +.1% expected
  • Australian Unemployment rate 6.0% vs 6.1% expected
  • Chinese Inflation 1.4% vs 1.3% expected
  • Canadian Unemployment rate 6.8% vs 6.9% expected
  • Australian Business Confidence 10 vs 8 previous

NZD/USD

The New Zealand dollar squeezed higher early last week as ‘risk off’ sentiment swept the market in the wake of ongoing Greek concerns and Chinese stock market volatility. With both those situations having been contained for the time being we are seeing a return of risk appetite. That is proving positive for the USD, as potential barriers to a Fed interest rate hike have now been removed, and negative for the NZD. Locally we have two key releases to digest this week with dairy prices and inflation both set to hit the wires. A soft inflation figure will give the green light for NZD sellers to test the cycle lows at 0.6621, while a stronger than expected result could see the NZD squeeze further up toward key trend resistance around 0.6800. From the US this week we get producer prices, inflation and consumer sentiment, along with Fed Chair Yellen’s semi-annual testimony before the senate banking committee.

DIRECT FX Current level Support Resistance Last wk range
NZD / USD 0.6690 0.6600 0.6800 0.6621 – 0.6770

NZD/AUD (AUD/NZD)

After squeezing higher in the first half of last week, as risk off sentiment swept the market, this pair has largely been side-lined and a tight range has developed. The New Zealand dollar seems comfortable for the time being trading around 0.9040 (1.1062) to its Australian cousin. Minor support around 0.9000 (resistance around 1.1111) has contained the NZD downside over recent days and this keeps open the prospect of a test toward key resistance around 0.9160 (support around 1.0917). Any move back below 0.9000 (above 1.1111) would quickly turn the focus back to the NZD downside. The key to near term direction however may well lie in a couple of releases from NZ this week. First up we have another dairy auction to digest then on Thursday morning we get the Q2 inflation figure. Australian data could also influence, starting with business confidence this afternoon. Later in the week we get consumer sentiment and inflation expectations figures.

DIRECT FX Current level Support Resistance Last wk range
NZD / AUD 0.9005 0.8850 0.9160 0.8889 – 0.9069
AUD / NZD 1.1105 1.0917 1.1299 1.1027 – 1.1250

NZD/GBP (GBP/NZD)

Risk sentiment in the wider market has played a big part in driving the New Zealand dollar over the past week. Against the UK Pound this saw the pair squeeze up just over 0.4400 (under 2.2727) early last week as ‘risk off’ sentiment saw short (sold) NZD positions unwound. However, the market did fail to overcome minor resistance around 0.4410 (support around 2.2676) and with a Greek deal now looking likely the NZD has seen renewed pressure. Positive releases from the UK are also supporting the Pound and we could easily see a return to recent lows at 0.4260 (highs at 2.3474). We do have plenty of data to digest this week from both countries. From NZ we have another Fonterra dairy auction along with inflation for the second quarter. While from the UK we also have inflation figures as well as employment and wage data. BOE Governor Carney is also set to testify in front of parliament’s Treasury Committee during the inflation report hearings.

DIRECT FX Current level Support Resistance Last wk range
NZD / GBP 0.4320 0.4300 0.4500 0.4260 – 0.4403
GBP / NZD 2.3148 2.2222 2.3256 2.2712 – 2.3475

 NZD/CAD

Like most NZD crosses this pair recovered off recent lows mid last week as risk aversion drove position squaring which sent the NZD higher. The pair traded at 0.8600 on Friday night, before stronger than forecast Canadian employment data saw a sharp bout of CAD appreciation. Over the next couple of days there are a number of releases that are likely to influence price action. The Bank of Canada monetary policy statement is out on Wednesday night along with another dairy auction from Fonterra. On Thursday morning we have NZ inflation data set for release. 0.8400 to 0.8600 provide the broad parameters to start the week and those levels may well contain price action in the coming days.

DIRECT FX Current level Support Resistance Last wk range
NZD / CAD 0.8520 0.8400 0.8600 0.8406 – 0.8600

NZD/EURO (EURO/NZD)

With the Greek situation taking centre stage in world markets recently we have seen some choppy trading in the Euro and its crosses. Against the NZD this caused the weeks high and low to trade within about 12 hours of each other heading into the weekend. With the base for a deal having finally been reached in the past 24 hours the market can now start to look forward. The initial reaction has not been positive for the Euro and this is driving the NZDEUR back up toward 0.6100 (1.6393). Unfortunately there is still a lot to be done, and a number of new deadlines, starting with the Greek government passing critical new reform measures by Wednesday night. This means there is still a lot of uncertainty out there and as such the market will remain somewhat nervous over the coming days. Add to this data from NZ in the form of a dairy auction and second quarter inflation numbers and we could see further sharp swings in the pair. On the downside support comes in around 0.6000 (resistance around 1.6667) while on the topside there is resistance around 0.6150 (support around 1.6260).

DIRECT FX Current level Support Resistance Last wk range
NZD / EUR 0.6080 0.6000 0.6200 0.5996 – 0.6117
EUR / NZD 1.6447 1.6129 1.6667 1.6348 – 1.6677

 NZD/YEN

This pair staged a bounce from recent cycle lows mid last week helped by a squeeze higher in the New Zealand dollar. Risk aversion in the wider market has been a key driver recently, and in the wake of the recent Greece deal announcement the Yen has weakened significantly. That helped drive the pair up to 83.01 last night. There is still a lot of uncertainty around the smooth passage of this deal through the Greek parliament and as such near term direction is a very tough call. We also have key NZ data in the form of anther dairy auction and second quarter inflation to digest of the coming days along with the Bank of Japan monetary policy statement.

DIRECT FX Current level Support Resistance Last wk range
NZD / YEN 82.60 81.00 83.00 80.68 – 83.01

AUD/USD

The Australian dollar has been under pressure for the past couple of weeks, driven lower by soft iron ore prices and concerns about Chinese stocks. The currency did benefit temporarily from better than forecast employment data on Thursday, but it failed toward the 0.7500 level. With a Greek deal now on the cards we are see a return of risk appetite and this is benefiting the USD as potential barriers to a Fed interest rate hike have now been removed. As such the AUD is within spitting distance of cycle lows at 0.7373. For the time being the risks remain skewed to the downside. From Australia this week we have business confidence, consumer sentiment and inflation expectations to digest. While from the US we get producer prices, inflation and consumer sentiment, along with Fed Chair Yellen’s semi-annual testimony before the senate banking committee.

DIRECT FX Current level Support Resistance Last wk range
AUD / USD 0.7425 0.7300 0.7500 0.7373 – 0.7498

AUD/GBP (GBP/AUD)                            

Last week’s better than forecast Australian employment data helped this pair trade up to key downtrend resistance at 0.4870 (2.0535 support). The cross failed to overcome that level however and we saw a sharp pull back on the back of much better than forecast UK trade balance data. A fresh cycle low of 0.4755 (2.1030 high) then traded in the early stages of this week. While downtrend resistance, now at 0.4850 (2.0620), continues to cap any periods of AUD strength the risks remain skewed to further weakness. However there are indications that downside momentum is waning and as such dips toward 0.4700 (2.2180) should find support for the AUD. From Australia this week we have business confidence, consumer sentiment and inflation expectations to digest. While from the UK we also have inflation figures as well as employment and wage data. BOE Governor Carney is also set to testify in front of parliament’s Treasury Committee during the inflation report hearings.

DIRECT FX Current level Support Resistance Last wk range
AUD / GBP 0.4792 0.4725 0.4925 0.4755 – 0.4868
GBP / AUD 2.0868 2.0305 2.1164 2.0541 – 2.1033

AUD/EURO (EURO/AUD)

With Greece and the Euro very much in focus recently we have seen some good volatility on all Euro crosses. The Euro surged late last week on hopes of a deal being reached and this caused fresh cycle lows at 0.6638 (1.5065 highs) to trade. There has been a sharp turnaround from those lows however, as the eventual agreement reached in the past 24 hours does little to secure Greece long term financial future. The Euro has therefore seen pressure and as such this cross has recovered back toward 0.6750 (1.4815). There is a fair amount of resistance between 0.6750 and 0.6800 (1.4705 – 1.4815) and as such the cross should start to struggle in that area. The immediate focus is on the Greek parliament now and it’s urgent need to pass reforms into law by Wednesday night. From Australia this week we have business confidence, consumer sentiment and inflation expectations to digest.

DIRECT FX Current level Support Resistance Last wk range
AUD / EUR 0.6745 0.6650 0.6850 0.6638 – 0.6898
EUR / AUD 1.4826 1.4599 1.5038 1.4710 – 1.5066

AUD/YEN

After trading to fresh cycle lows mid last week this pair has made a significant recovery. The turnaround was triggered by better than forecast Australian employment data on Thursday, but since then an improving risk appetite in the wider market has pressured the Yen. If minor resistance around 92.00 can be overcome the pair will target a move toward 94.00. We do have the Bank of Japan monetary policy statement this week to digest, along with Australian data in the form of consumer sentiment and inflation expectations.

DIRECT FX Current level Support Resistance Last wk range
AUD / YEN 91.65 94.50 96.30 89.23 – 92.01

AUD/CAD

We have seen largely sideway trade for this pair over the past week between the broad parameters of 0.9400 and 0.9500. Both countries have seen better than forecast employment data and this has only reinforced the current range trading conditions. We have the Bank of Canada monetary policy statement to digest this week which should prove very interesting. If we saw some CAD weakness in the wake of that release the target would be a test of stronger resistance around 0.9600. From Australian the week we get data in the form of consumer sentiment and inflation expectations.

DIRECT FX Current level Support Resistance Last wk range
AUD / CAD 0.9459 0.9400 0.9600 0.9397 – 0.9514

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Market commentary:

The announcement in the past 24 hours that a deal has been reached between Greece and its creditors will be a relief to many market participants. It certainly won’t be of much comfort to Greece however, as it falls well short of securing Greece’s long term financial future. In fact it’s hard to see how the outcome of this bailout will be any more successful than the last two. Unfortunately we have more deadlines to look forward to with the first been Wednesday night. Greece’s parliament must pass critical reform measures by that time to keep the agreement on track. China too, seems to have contained its stock market collapse for now at least, albeit mostly because trading in many stocks is still suspended. The initial impact of these recent developments has been a return of risk appetite to the market. That has benefited the USD more than anything as many now see the potential barriers to a Fed tightening this year as diminished. The timing of any rate hike is still very much up in there air, with September somewhat less likely than December at this stage.

Australia

Sentiment toward the Australian dollar has taken a big hit in recent weeks with iron ore prices having fallen by nearly 25% in the past month. Last week’s Australian employment data provided a brief respite for the currency, with full time employment gaining much more than forecast. However, concerns around the Chinese stock market and the implication for the broader Chinese economy, continue to weigh. Over the coming days we have data on business confidence, consumer sentiment and inflation expectations to digest.

New Zealand

There has been no economic data of significance released from NZ in the past week. In the coming days there are two key releases for the local market to digest. Tomorrow night we have another Fonterra GDT dairy auction, and then on Thursday morning we get inflation data for the second quarter. The market is expecting inflation to print around 0.5%. The falling New Zealand dollar will push inflation higher, but those effects will take time to flow through and it may not be until the second half of this year until it’s impact is really felt.

United States

Data from the United State over the past week has been largely uninspiring. After the Fed minutes suggested a slightly ‘dovish’ slant to FOMC proceedings, the market was keen to see if Yellen would give further insight when she spoke on Friday. In the end she pretty much stuck to her recent script, suggesting it would be appropriate to begin raising interest rates “at some stage this year”. She did add that in her own view there is ‘a little more slack’ in employment than the 5.3% unemployment rates suggests, and that slow wage growth is consistent with that view. Tonight to draw focus we have retail sales data and if there is one metric that raises concern about the US recovery, it is the lack of growth in consumer spending. Later in the week we get producer prices, inflation and consumer sentiment. We will also hear from Fed Chair Yellen again when she give her semi-annual testimony before a couple of senate committees.

Europe

With the basis of a deal between Greece and its creditors finally agreed last night, it hard to see who’s come out of this a winner. Greece is certainly a loser, but the negotiations opened up divisions within the broader European Union that will take a long time to heal. Former Italian prime minister summed it up best when he said “Greece has been devastated and humiliated. Europe has shown itself to be pharisaical and incapable of leadership and solidarity”. With Greece starring over the edge into the financial abyss, PM Tsipras caved in on virtually every demand and agreed to a deal much worse than what was on offer only two weeks ago. The Greek people won’t be happy, only 10 days ago they voted “no” to a package much better than the one just agreed to. It is likely to be political suicide for Tsipras and maybe even for the Syriza party. The real problem is the deal does nothing solve the issue of Greece’s long term debt sustainability. Tsipras claims that Greece has secured a debt restructuring, but the agreement offers no more than a vague promise on the debt issue. On top of this a fresh round of crushing austerity will impose self-defeating levels of fiscal contraction. This will cause the debt to GDP level to actually rise, which is exactly what happened after the previous bailouts. If the deal even makes it through the Greek parliament, and that looks like it will be a fight in itself, we will be back to square one within a couple of years. Europe has learnt nothing and this is German austerity at it most harsh. France and Italy, along with others, believe Germany has abused its power in the eurozone to push a narrow, mean-spirited agenda. Divisions like this, at the core of the Eurozone, are very unhealthy. In a sign that the market too is less than convinced about the appropriateness of the deal, the Euro has been losing ground since the announcement.

United Kingdom

We have seen some encouraging economic data releases from the United Kingdom over the past week. The trade balance for May improved unexpectedly, as imports fell and exports to the Euro region climbed. The trade gap in goods narrowed to GBP 8 billion from 9.4 billion in April. Britain’s trade deficit is now at its lowest level in almost two years. This suggests that net trade may actually contribute to growth in the second quarter after acting as a drag in the first quarter. The Bank of England (BOE) credit conditions survey was released last night and shows credit for SME’s is at its highest level for five years. More than anyone, small and medium sized enterprises struggled to get funding in the years after the global financial crises and an easing of credit to that sector will be positive for growth. The report also showed the demand for mortgages is at its highest level in since the fourth quarter of 2013. That’s a clear signal of not only confidence in the economy, but also that real wage growth is expected to continue. Tonight from the UK we have inflation data and then later in the week employment and wage data. We will also hear from BOE Governor Carney who is set to testify in front of parliament’s Treasury Committee during the inflation report hearings.

Japan

The past week has seen a couple of positive releases in the form of better than forecast current account balance and core machinery orders. The producer prices index remains soft however, and last night we saw a disappoint result from tertiary industry activity. The main focus this week is now on the Bank of Japan (BOJ) monetary policy statement set for release on Wednesday. Although the central bank is not expected to take any further action at this stage, there have been reports they will downgrade their growth forecasts. This may well be a precursor to action later in the year.

Canada

After disappointing results last week from the trade balance and building permits, Canada produced a positive surprise with better than forecast employment data on Friday night. Although overall employment was only slightly stronger than expected at -6.4K, there was a huge swing from part time to full time jobs. Full-time employment was actually up 64.8k. There is plenty to digest this week as well with the main event being the Bank of Canada (BOC) monetary policy statement on Wednesday night. With a number of recent indicators suggesting growth is failing to pick up from the poor first quarter the market now pricing in a 40% chance of an interest rate cut. Other data to watch out for includes manufacturing sales and inflation.

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Ian Dobbs is a currency analyst with Direct FX You can contact him here »