Recent Chinese stock market loses equivalent to 10 times Greece's GDP; fluid situation in Greece and tension between parties rising; declining dairy prices holding down NZD

By Ian Dobbs*:

After five months of negotiations, countless deadlines and one referendum, are we any closer to an agreement between Greece and its creditors?

The short answer is no. In fact for almost all major forecasting institutions the base case scenario is now a Greek exit.

It’s still a very fluid situation but with the Greek economy close to collapse and relations between the two sides are at an all-time low, conditions are hardly conducive to a productive dialog.

Meanwhile in China, authorities are struggling to contain the bursting of a stock market bubble. The three week plunge in Chinese equities of almost 30% wiped out close to US$3.0 trillion in market value, more than ten times the gross domestic product of Greece last year.

For New Zealand and Australia what’s going on in China is far more important than the never ending Greek saga.

The Chinese central bank’s efforts to stabilize the market just over a week ago by cutting interest rates and reducing reserve requirements failed to do the job.

This past weekend they went a step further with a range of measures, the most eye opening of which is to effectively to pledge billions of central bank funds to a market stabilization funds that will buy stocks through 21 major security houses.

This helped the market bounce over 7% at one stage yesterday, but at the close it was only 2.4% higher. Some 80% of transactions in China’s stock market are carried out by unsophisticated ‘retail investors’.

The 20 million or so trading accounts opened from mid-April to mid-June are currently badly underwater and you have to imagine they will all be happy to exit their trades on any potential bounce.

The action taken by the Chinese authority’s shows just how worried they are about the negative economic consequences of a stock market collapse.

Major Announcements last week:

  • Australian Private Sector Credit MoM +.5% as expected
  • German Unemployment rate 6.4% as expected
  • Q1 UK final GDP .4% as expected
  • European Core Inflation .8% as expected
  • Canadian GDP MoM -.1% vs +.1% expected
  • US ISM Manufacturing PMI 53.5 vs 53.1 expected
  • US Non-farm Payrolls growth 223k vs 230k expected
  • Australian retail Sales +.3% vs +.5% expected
  • NZ NZIER Business Opinion 46.4 vs 47.8 previous
  • NZ GDT Price Index -5.9%

NZD/USD

The New Zealand dollar has remained under pressure this past week weighed on by declining dairy prices, declining business confidence and wider market risk aversion. In early trade yesterday the local currency fell to a five year low against the USD at 0.6649 and we’re currently trading only around 20 points above there. US data has been mixed recently and the market has reduced the chance of a September interest rate hike to around 30%, but the USD remains well supported thanks in part to safe haven flows on the back of Greek uncertainty. The risks for the pair remain to the downside, and key trend resistance now comes in around 0.6860. It will take a move above that level to suggest the current down leg, that started at the end of April around 0.7750, has finally run its course. Still to come this week from the US we have the trade balance, the FOMC minutes, weekly unemployment claims and a speech from Fed Chair Yellen to digest.

DIRECT FX Current level Support Resistance Last wk range
NZD / USD 0.6676 0.6600 0.6860 0.6649 – 0.6849

NZD/AUD (AUD/NZD)

The past week has seen a sharp recovery in this pair after trading to a low of 0.8749 (1.1430 high) last Thursday. The  NZ dollar bounce was largely driven by dramatic underperformance of the Australian dollar. The AUD has suffered as economic data disappointed and iron ore prices saw renewed weakness. This helped drive the pair back up through the key 0.8850 (1.1300) level and back over 0.8900 (under 1.1235). The next topside resistance level comes in around 0.9000 (support 1.1110) and I would expect that to cap any further gains over the coming week. The RBA release their rate statement later this afternoon which provides the immediate focus. Later in the week we also have Australian employment data to digest.

DIRECT FX Current level Support Resistance Last wk range
NZD / AUD 0.8920 0.8850 0.9000 0.8749 – 0.8940
AUD / NZD 1.1211 1.1111 1.1299 1.1185 – 1.1430

NZD/GBP (GBP/NZD)

The New Zealand dollar continues to underperform the UK Pound and in the past few hours a fresh cycle low at 0.4272 traded ( 2.3410). The NZD has been weighed on by declining dairy prices, declining business confidence and wider market risk aversion tied to the Greek situation. In the UK we have seen some positive readings from construction and service sector PMI’s and these have outweighed the softer than expected result from the manufacturing sector. Initial resistance comes in around 0.4310 (support 2.230) and while through that level the risks are all skewed to the NZ dollar downside. Tonight from the UK we get manufacturing production data then later in the week we have the BOE rate meeting to draw focus.

DIRECT FX Current level Support Resistance Last wk range
NZD / GBP 0.4282 0.4150 0.4310 0.4272 – 0.4353
GBP / NZD 2.3354 2.3202 2.4096 2.2974 – 2.3407

 NZD/CAD

Although we have seen some volatility, there has been little overall direction in this pairing over the past two weeks. Both the New Zealand dollar and the Canadian dollar have been under pressure recently and as such the cross has traded sideways. In NZ it’s been soft dairy prices and declining business confidence that has done the damage, while in Canada disappointing GDP and Ivey PMI data have combined with renewed weakness in oil prices to pressure the CAD. This current period of consolidation comes with the context of the much broader downtrend that has been in play since early April. This keeps the risks for and eventual break out to the downside. Only a move above resistance around 0.8570 would bring that outlook into questions. Still to come from Canada this week we have the trade balance, building permits and employment change data to digest.

DIRECT FX Current level Support Resistance Last wk range
NZD / CAD 0.8450 0.8350 0.8550 0.8359 – 0.8513

NZD/EURO (EURO/NZD)

The Euro has been surprisingly calm in the face of recent events. We have certainly seen volatility but, not the broad based decline many had predicted. There is still plenty of water to flow under the bridge with a solution to the Greek crisis far from certain, so the market will remain nervous. Relative underperformance of the New Zealand dollar saw fresh cycle lows at 0.6016 (high’s 1.6622) trade late last week. The market is currently not far above that level either. Key downtrend resistance now comes in around 0.6110 (resistance 1.6366) and while through that level the risks remain skewed to the NZ dollar downside. However, a break above 0.6110 (below 1.6366) could see a sharp correction higher develop. With nothing from NZ out over the rest of this week, and Euro data side-lined by the Greek situation, all eyes will be on any progress, or lack thereof, in renewed negotiations.

DIRECT FX Current level Support Resistance Last wk range
NZD / EUR 0.6050 0.6000 0.6110 0.6016 – 0.6117
EUR / NZD 1.6529 1.6367 1.6667 1.6348 – 1.6623

 NZD/YEN

In times of broad based risk aversion this is one pair that suffers badly. The New Zealand dollar sees pressure while the Yen often appreciates. That is exactly what happened early yesterday morning as the market digested the Greek referendum outcome. This drove the NZDJPY down to a low of 80.94, but the pair quickly recovered. The market in general was much more orderly than many had expected, and this aided in the relatively quick bounce. With the outcome of the Greek situation still far from certain we could easily see further periods of heightened risk aversion. This makes and near term predictions on price action extremely difficult. The key level to watch at the moment is resistance around 82.30. A break above there could see a  sharp correction higher develop. Still to come this week from Japan we have the current account, core machinery orders and consumer confidence data.

DIRECT FX Current level Support Resistance Last wk range
NZD / YEN 81.90 80.00 82.30 80.94 – 83.95

AUD/USD

The past week has seen a sharp decline for the Australian dollar driven lower by disappointing retails sales data and renewed softness in iron ore prices. US data has been mixed recently and the market has reduced the chance of a September interest rate hike to around 30%. In the face of this the USD remains well supported thanks in part to safe haven flows on the back of Greek uncertainty. The pair traded to fresh cycle lows at 0.7454 in the early stages of this week and we’re currently not far above that level. The immediate focus is on the RBA rate statement out this afternoon. The central bank is expected to leave interest rates unchanged, but signal their continued easing bias. There is resistance on the topside around 0.7550 and then again at 0.7600. The latter level will likely contain any period of strength over the coming week. On Thursday we also have Australian employment data to digest, while from the US this week we have the trade balance, the FOMC minutes, weekly unemployment claims and a speech from Fed Chair Yellen to draw focus.

DIRECT FX Current level Support Resistance Last wk range
AUD / USD 0.7485 0.7350 0.7550 0.7454 – 0.7738

AUD/GBP (GBP/AUD)                            

It’s been a very tough week for the Australian dollar with sharp losses seen in most currency pairs. Disappointing retails sales data and renewed weakness in iron ore prices have weighed on the AUD and this has helped to dive it to a fresh cycle low of 0.4792 GBP (highs 2.0868). There are no indications this leg lower has run its course and as such the risks remains skewed to the Australian dollar downside. Today’s RBA rate statement provides the immediate focus, then on Thursday we have Australian employment data. UK data has for the most part been supportive of the economic outlook going forward and tonight we have manufacturing production digest ahead of the BOE rate meeting on Thursday.

DIRECT FX Current level Support Resistance Last wk range
AUD / GBP 0.4800 0.4725 0.4925 0.4792 – 0.4929
GBP / AUD 2.0833 2.0305 2.1164 2.0290 – 2.0870

AUD/EURO (EURO/AUD)

This pair has lost significant ground over the past week, driven lower by weakness in the Australian dollar. The Euro itself has been surprisingly calm in the face of recent events. We have certainly seen volatility but, not the broad based decline many had predicted. An eventual outcome to the Greek crisis is far from certain so there is still plenty of potential for further volatility, but for now AUD underperformance is the overriding theme. Disappointing Australian data and renewed declines in iron ore prices have done the damage to the local currency and the risks remain to the downside for now. Today’s RBA rate statement provides the immediate focus, then on Thursday we have Australian employment data. In Europe it is still all about Greece with economic data taking a back seat for now.

DIRECT FX Current level Support Resistance Last wk range
AUD / EUR 0.6782 0.6750 0.6950 0.6760 – 0.6949
EUR / AUD 1.4745 1.4388 1.4815 1.4390 – 1.4792

AUD/YEN

Weakness in the Australian dollar has combined with wider market risk aversion to see this pair trade down below 91.00 in early trade yesterday. The relatively calm response in markets to the outcome of the Greek referendum saw the pair quickly bounce back above 92.00, but for now the risks remain to the downside. With the Greek situation far from certain there is plenty of potential for further periods of risk aversion. We also have the RBA rate statement this afternoon to digest and this provides the immediate focus for the market. Later in the week we get Australian employment data, while from Japan we get the current account, core machinery orders and consumer confidence figures.

DIRECT FX Current level Support Resistance Last wk range
AUD / YEN 91.85 90.50 92.50 90.79 – 94.91

AUD/CAD

Although we have seen some very significant swings in this pair over recent week, there has been little in the way of overall direction. Both the Australian dollar and the Canadian dollar have seen periods of pressure and this has driven the volatility. declining commodity prices and softer than forecast economic data has weighed on each currency and for the time being we can expect more of the same. Levels toward, or under, 0.9400 look to offer short term value, while any move above 0.9600 is a selling opportunity. The RBA release their rate statement this afternoon and then later in the week we have Australian employment data. Still to come from Canada this week we have the trade balance, building permits and employment change data to digest.

DIRECT FX Current level Support Resistance Last wk range
AUD / CAD 0.9475 0.9400 0.9600 0.9389 – 0.9664

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Market commentary:

After five months of negotiations, countless deadlines and one referendum, are we any closer to an agreement between Greece and its creditors? The short answer is no. In fact for almost all major forecasting institutions the base case scenario is now a Greek exit. It’s still a very fluid situation but with the Greek economy close to collapse and relations between the two sides are at an all-time low, conditions are hardly conducive to a productive dialog. Meanwhile in China, authorities are struggling to contain the bursting of a stock market bubble. The three week plunge in Chinese equities of almost 30% wiped out close to US$3.0 trillion in market value, more than ten times the gross domestic product of Greece last year. For New Zealand and Australia what’s going on in China is far more important than the never ending Greek saga. The Chinese central bank’s efforts to stabilize the market just over a week ago by cutting interest rates and reducing reserve requirements failed to do the job. This past weekend they went a step further with a range of measures, the most eye opening of which is to effectively to pledge billions of central bank funds to a market stabilization funds that will buy stocks through 21 major security houses. This helped the market bounce over 7% at one stage yesterday, but at the close it was only 2.4% higher. Some 80% of transactions in China’s stock market are carried out by unsophisticated ‘retail investors’. The 20 million or so trading accounts opened from mid-April to mid-June are currently badly underwater and you have to imagine they will all be happy to exit their trades on any potential bounce. The action taken by the Chinese authority’s shows just how worried they are about the negative economic consequences of a stock market collapse.

Australia

The Australian dollar has seen real pressure over the past week as disappointing data and soft commodity prices have weighed. Retail sales for May came in below expectation at +0.3%, with the prior result also revised down a touch. The Australian trade deficit narrowed in May, but not by as much as expected. April’s deficit was also revised to be even wider than originally reported. Iron ore, which is such a key commodity for Australia has fallen more than 10% in a little over a week. Production in Australia and Brazil is not being met with demand from China and few are predicting the situation to improve any time soon. All of this will be of concern to the Reserve Bank of Australia (RBA) who have their regular interest rate meeting today, the result of which will be release at 4.30pm AEST. Although no one is expecting a cut from the central bank today, they may well reinforce their easing bias. On Thursday we have employment data to digest and with issues creeping into the compilation of the figures over recent months, it’s been a tough one to predict.

New Zealand

The only economic data of note released since last week’s poor dairy auction has been the NZIER’s Quarterly Survey of Business Opinion (QSBO). It hit the wires earlier this morning and confirmed other confidence indicators that have shown declines recently. The QSBO declined from 23 prior to a reading of just 5 in the second quarter. That’s the lowest level in three years. Developments in China, further weakness in dairy prices, and declines in confidence indicators are all combining to see many forecasters calling for two, or even three, more interest rate cuts from the RBNZ. The New Zealand dollar has been weighted on by all of the above, and along with a healthy dose of risk aversion early on Monday morning thanks to the Greek referendum, it traded to a fresh five year low against the USD. There is no other economic data scheduled for release from NZ this week, but with plenty of action in the wider market volatility will remain high.

United States

Recent economic data from the United States has been somewhat underwhelming, and it won’t have strengthened the case for a September interest rate hike by the Fed. The non-farm payrolls figure came in below expectation at +223k, although that is still a healthy level of job gains. The unemployment rate fell to 5.3%, close to what the Fed considers full employment, but its decline was driven by the participation rate – the share of the working age population in the labour force – falling to the lowest level in 40 years. More concerning was the stagnant wage growth which came in flat versus +0.2% expected. That caused the year on year rate of wage growth to fall back to 2.0% from 2.3%. That’s hardly going to convince the Fed that a pickup in inflation is just around the corner. Factor order data also hit the wires late last week and this too came in softer than forecast. The report also contained negative revisions to core durable goods orders, which have now shown no growth in over a year. Last night we got the latest reading of ISM non-manufacturing PMI. The index did increase to 56.0, but this was below forecasts which had been for an outcome of 56.5. Still to come this week we have the trade balance, the FOMC minutes, weekly unemployment claims and a speech from Fed Chair Yellen to digest.

Europe

Greece has again dominated headlines not only in Europe, but around the world this week. The referendum held on Sunday produced a resounding ‘no’ vote to the previously proposed conditions of further reform and austerity demanded by Greece’s creditors before any more financial assistance it granted. PM Tsipras believes the referendum has strengthened his hand in negotiations. The reality is he has burnt any bridges with creditors who now have deep distrust of him and it’s going to be harder than even to come to an agreement. He’s also pushed the country to the brink of economic collapse. If he doesn’t reach a deal extremely soon, there won’t be much of an economy left to rescue. The banking system is teetering on the brink of insolvency. It has only kept alive the past few months with emergency liquidity assistance from the ECB. Against all promises from the Greek government before the referendum, the Greek banks will not be opening today or tomorrow. If this goes on for much longer a social catastrophe will unfold. Shops are already ready running of stock and soon hospitals will run out of medicine. It’s hard to see how a referendum has helped the situation. What has strengthened PM Tsipras’ hand at the negotiating table was the release of an IMF report on Thursday that showed the IMF have believed for a long time that Greece’s debt level is unsustainable. Yet the EU, ECB and IMF have steadfastly refused to talk about a debt renegotiation during negotiations to date. The coming days will be critical to see if there is any chance the two sides can come together, but for most forecasters it looks very much like a Greek exit is on the cards.

United Kingdom

Although manufacturing PMI from the UK declined last week, we did see improvements in both the construction and service sector readings. Both those PMI’s also came in above forecast and this suggests the economy should continue to grow at a reasonable pace. Growth in the service sector is of particular importance as it makes up two thirds of the UK economy. The PMI outcomes are consistent with growth picking up from 0.4% in quarter one to 0.5% in quarter two and it keeps a Bank of England (BOE) interest rate hike in the next six months well on the table. Tonight we get manufacturing production data then later in the week we have the BOE rate meeting to draw focus.

Japan

The key economic release from Japan in the past week was the quarterly Tankan survey. It’s a massive survey of business sentiment with a near 100 per cent response rate, and this makes it one of the best barometers of economic health in Japan. It continued to show a theme that’s been prevalent for some time now, with improving confidence indicators for large manufacturing and non-manufacturing companies, but stagnate readings for smaller firms. The weaker Yen is certainly helping large manufacturers who also forecast strong capital expenditure plans for the year. This will have made pleasing reading for the Bank of Japan (BOJ) after recent mixed data suggests the economy may have it a temporary soft patch in the second quarter. Still to come this week we have the current account, core machinery orders and consumer confidence data.

Canada

The only data released in Canada since last Wednesday’s disappointing GDP figure, was the Ivey PMI reading out last night. The index fell to a three month low at 55.9 from a prior reading of 62.3. Although a decline was expected, this pressured the Canadian dollar somewhat that has also been weighed on by recent declines in oil prices. There is still plenty to digest over the coming days with the trade balance, building permits and employment change all set for release.

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