Clock is ticking for Greece and a forced exit from the euro a possibility; expectations around RBA rate cuts gyrate between March and April

By Ian Dobbs*:

Continuing negotiations between Greece and the EU remain the focus in Europe, with little sign so far that either party is willing to relent. The clock is ticking with Greece’s current bailout deal, complete with its demands for fiscal austerity, due to expire on the 28th Feb.

Greece will run out of money shorty after that and be forced to leave the Euro. The market generally believes a deal will be reached, albeit most likely at the last minute, as nobody wants to see Greece leave the Euro.

So although we will see some Euro appreciation if the two parties come together, the big risk is a dramatic fall in the Euro if an agreement is not reached. Some economists suggest a Greek exit could see the EURUSD fall as far as 0.9000.

Looking closer to home and the New Zealand dollar has been one of the better performing currencies over the past week. Gains have been seen on most crosses helped by strong retail sales data and stable monetary policy outlook.

All eyes remain on the Reserve bank of Australia as the expectations for a further cash rate cut gyrates between their next meetings in either March or April.

Major Announcements last week:

• Chinese Inflation +.8% vs +1.1% expected

• UK Manufacturing +.1% vs +.3% expected

• US Retail Sales -.9% vs -.4% expected

• European GDP +.3% vs +.2% expected

• US UoM Consumer Sentiment 93.6 vs 98.2 expected

• NZ Retail Sales +1.5% vs +1.1% expected

• Japanese GDP +.6% vs +.9% expected

NZD/USD

NZD/AUD (AUD/NZD)

The New Zealand dollar hit a fresh high against the Australian dollar last night at 0.9677 (low of 1.0334). These gains come as recent data highlights the divergent economic performance of the two countries. Late last week Australia saw very weak employment numbers which have weighed on the AUD. On the other hand New Zealand released stronger than forecast retail sales numbers yesterday, which boosted demand for NZ dollars. A further cut in interest rates from the Reserve Bank of Australia is expected over the coming months, while the RBNZ are likely to remain on hold into 2016. That expectation for a widening interest rate differential has helped to drive the pair to it recent highs. However, caution is warranted about the expectation for further gains toward parity. While the interest rate differential will likely widen further it is unlikely to reach the historical extremes of 200 basis points. This should mean the New Zealand dollar will find gains over 0.9700 (under 1.0309) much harder to sustain. Still to come this week from NZ we have the latest dairy auction from Fonterra along with the producer prices index. The economic calendar from Australia is looking pretty light for the rest of the week with just the leading index of any note.

NZD/GBP (GBP/NZD)

The New Zealand dollar has made further gains against the UK Pound this week trading just shy of resistance at 0.4900 (2.0410 support) in the past 12 hours. Strong retail sales data from NZ yesterday has underpinned these recent gains. Whether or not we see a break above 0.4900 (below 2.0408) will largely depend on the outcome of a number of key economic releases from both countries over the coming days. Tonight from the UK we have inflation figures, then later in the week we get employment and retail sales data. While from NZ, we have the latest dairy auction from Fonterra to draw focus. A failure to break above 0.4900 (below 2.0408) should see the pair eventually turn back down and test levels under 0.4800 (over 2.0833). A move above 0.4900 (below 2.0408) will open the way for gains back toward 0.5000 (2.0000).

 NZD/CAD

The New Zealand dollar has made some gains against the Canadian dollar this week helped by strong NZ retails sales data. However, the pair does seem entrenched in the current 0.9200 to 0.9400 range and I expect that to continue over the coming week. Good manufacturing sales data from Canada and small recovery in oil prices has lent some recent support to the CAD and these factors should make resistance around 0.9400, a formidable barrier for the pair. Still to come this week from NZ we have the latest dairy auction from Fonterra along with the producer prices index. While from Canada we get wholesale sales and retail sales figures, both of which will be closely watched.

NZD/EURO (EURO/NZD)

The New Zealand dollar has continued to make ground against the Euro this week, being driven on two fronts. Firstly we have seen NZD strength helped by sold retail sales data. Secondly, we have seen the Euro under pressure as an agreement between Greece and the EU has so far failed to materialise. These forces have driven the pair back up over 0.6600 (under 1.5152) where it now trades. Although both sides of the Greek / EU negotiations seem polarized, the reality is a deal with Greece could be announced at any stage and this would likely see the Euro appreciate. If no agreement is reached by Friday, and Greece hasn’t applied for an extension of the bailout programme, we will likely see further Euro weakness as Greece will only be days away from running out of money.

 NZD/YEN

The New Zealand dollar has made further gains against the Japanese Yen this week, being helped by strong NZ retail sales data. The pair has traded to a high of 89.27 so far and the risks remain to the topside with a test of the 90.00 level expected over the coming week. Recent soft Japanese data hasn’t done much for the economic outlook, although there is a growing feeling that the Bank of Japan (BOJ) is very reluctant to ease further as the negative impact of a extremely weak Yen could outweigh any potential benefits. Tomorrow from Japan we have the BOJ monetary policy statement to digest, then on Thursday we get trade balance data. While from NZ this week we have the latest dairy auction from Fonterra to draw focus.

AUD/USD

After staging a sharp recovery from the lows of 0.7646 seen in the wake of last Thursday’s Australian employment data, the Australian dollar has since languished around the 0.7750 area. The AUD has failed to make any gains in the face of some weaker than expected US data, although that doesn’t rule out a test of resistance around 0.7850 at some stage. I do suspect that level will cap any periods of strength in the near term. There is little in the way of economic data set for release from Australia for the remainder of the week, so focus will turn to offshore releases. From the US however, there is plenty to digest including building permits, producer prices, industrial production, the FOMC minutes, and the Philly Fed manufacturing index. Expect a range of 0.7650 to 0.7850 over the coming week.

AUD/GBP (GBP/AUD)                            

The Australian dollar has staged a small recovery off the lows seen in the wake of last week’s poor employment data. Somewhat interestingly though the pair has failed to overcome initial resistance around 0.5070 (support at 1.9724). While that remains the case, the risks are skewed to further weakness. A move above 0.5070 (under 1.9724) would open the way for a move to 0.5150 (1.9417) and potentially even 0.5200 (1.9231). There is little in the way of economic data set for release from Australia for the remainder of the week, so focus will turn to offshore releases. To that end, tonight from the UK we have inflation figures then later in the week we get employment and retail sales data.

AUD/EURO (EURO/AUD)

This pair has continued its recovery from the lows seen in the wake of Thursday’s soft Australian employment data. The most recent gains have come in the past 24 hours as negotiations between Greece and the EU have failed to reach any agreement. Although both sides of the Greek / EU negotiations seem polarized, the reality is a deal with Greece could be announced at any stage and this would likely see the Euro appreciate. If no agreement is reached by Friday, and Greece hasn’t applied for an extension of the bailout programme, we will likely see further Euro weakness as Greece will only be days away from running out of money. There is little in the way of economic data set for release from Australia for the remainder of the week, so the focus will remain on developments out of Europe.

AUD/YEN

We have seen little in the way of a recovery from this pair since the sharp losses posted in the wake of last Thursday’s Australian employment data. The cross traded in a tight range around 92.00, and more of the same is expected in the very near term. Initial resistance around 93.00 is key and while below there the risk remain skewed to further weakness. There is little in the way of economic data set for release from Australia for the remainder of the week, while from Japan we have the BOJ monetary policy statement to digest tomorrow, then on Thursday we get trade balance data.

AUD/CAD

We have seen little in the way of direction for this pair since the sharp losses suffered after Thursday’s soft Australian employment data. There is support around 0.9600 while resistance on the topside comes in at 0.9800. Expect those two levels to contain trade over the coming week. With little set for release from Australia this week, focus now turns to Canadian economic data in the form of wholesale sales and retail sales.

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