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Greece's debt pile largely unsustainable although market reacts positively as agreement reached; market focus on Yellen speech; recent US data suggests slow down in economic activity

Currencies
Greece's debt pile largely unsustainable although market reacts positively as agreement reached; market focus on Yellen speech; recent US data suggests slow down in economic activity
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By Ian Dobbs*:

The agreement reached between Greece and the EU has generally been received positively by the markets. The reality is the agreement, at least at this stage, is very short on detail and we now have another major deadline to look forward to in four months.

Greece’s debt pile is largely unsustainable and the chance of meaningful growth in their economy is very limited with the crushing austerity imposed on the country. The EU has done exactly what it has been doing since the crisis developed five years ago. That is to ‘kick the can down the road’ by taking no decisive action now and push the problem into the future.

It’s hard to see how this is helping the Eurozone move forward. Fed Chair Janet Yellen’s semi-annual testimony before a senate committee tonight is the major focus for the markets this week.

Recent US data has suggested something of a slowdown in economic activity and there were hints in the FOMC minutes that the Fed could hold off hiking interest rates in June. This testimony tonight could be key in shaping market expectations.

Major Announcements last week:

  • GDT dairy price index +10.1%
  • Bank of Japan leave policy unchanged
  • UK unemployment 5.7% vs 5.8% expected
  • UK Average Earnings Index 2.1% vs 1.7% expected
  • Canadian Wholesale Sales 2.5% vs 0.4% expected
  • US building Permits 1.05m vs 1.08m expected
  • US Producer Prices -0.8% vs -0.4% expected
  • French Manufacturing PMI 47.7 vs 49.7 expected
  • German Manufacturing PMI 50.9 vs 51.8 expected
  • UK Retail Sales -0.3% vs -0.1% expected
  • Canadian Core Retails Sales -2.3% vs -0.7% expected

NZD/USD

The past week has seen relatively quiet trading for this pair below the key resistance level of 0.7600. For the most part the downside has been contained to levels around 0.7500, although we saw a brief dip to 0.7483 last night. This directionless trade may not last for much longer. A key testimony from Fed Chair Yellen tonight could well spark a broad move in the value of the USD. The market will be looking for any indication as to whether the Fed are likely to hike interest rates in June or not, and that expectation will drive the USD in the near term. Watch for any sustained break above 0.7600 as this could well indicate the start of a much broader correction higher. A target of 0.7850 could easily be achievable in that case. If Yellen suggests the Fed are remaining on course to hike in June then the pair will see downside pressure again. A break below 0.7450 would then open the way for a move back to 0.7300 and potentially 0.7200.

 
DIRECT FX Current level Support Resistance Last wk range
NZD / USD 0.7530 0.7450 0.7600 0.7483 - 0.7572

NZD/AUD (AUD/NZD)

The New Zealand dollar made a fresh high against its Australian cousin late last week at 0.9708 (low at 1.0301). But with upside momentum indicators fading, the pair was not able to sustain those lofty levels and a quick pullback ensued. This saw the pair trade to a low of 0.9587 (high of 1.0431) yesterday before recovering somewhat. We can expect more of the same price action over the coming week with the pair struggling to sustain moves toward, or over 0.9700 (1.0309). From New Zealand this week we get a speech from Governor Wheeler along with the trade balance, building consents, and business confidence data. The key driver for the pair however may well be Australian data in the form of private capital expenditure figures set for release on Thursday.

DIRECT FX Current level Support Resistance Last wk range
NZD / AUD 0.9650 0.9500 0.9700 0.9587 - 0.9708
AUD / NZD 1.0363 1.0309 1.0526 1.0301 - 1.0430

NZD/GBP (GBP/NZD)

The New Zealand dollar has traded in a very tight range against the UK Pound the past week with little overall direction. The pair has traded just above 0.4900 (below 2.04080 on a number of occasions, but those gains have not been able to be sustained. From my perspective this means the broad resistance area of 0.4900 remains intact and while that’s the case, the risks are skewed to the downside. I would expect to see the pair drift lower and test levels under 0.4800 (over 2.0833) again. A sharp move up through 0.4900 (down through 2.0408) however, would bring that view into question and open the way for a test of the psychologically important 0.5000 (2.0000) level. From New Zealand this week we get a speech from Governor Wheeler along with the trade balance, building consents, and business confidence data. While from the UK we have mortgage approvals, the Nationwide house price index, the second estimate of GDP, and preliminary business investment data.

DIRECT FX Current level Support Resistance Last wk range
NZD / GBP 0.4870 0.4750 0.4900 0.4860 - 0.4916
GBP / NZD 2.0534 2.0408 2.1053 2.0340 - 2.0576

 NZD/CAD

It has been a week of grinding appreciation for the New Zealand dollar over its Canadian counterpart, in a continuation of the move that began at the start of February. Mixed data from Canada has only served to reinforce expectations that we will see another interest rate cut from the Bank of Canada when they meet in March. This is keeping pressure on the Canadian dollar and it is unlikely a speech from Governor Poloz tomorrow or inflation data on Friday will alter that. Initial support comes in around 0.9400 and while the pair holds above that level the risk remain skewed to further gains. From New Zealand this week we get a speech from Governor Wheeler along with the trade balance, building consents, and business confidence data.

DIRECT FX Current level Support Resistance Last wk range
NZD / CAD 0.9468 0.9400 0.9600 0.9318 - 0.9491

NZD/EURO (EURO/NZD)

Discussions between Greece and the EU were the main focus for this pair last week. The Euro came under pressure late last week as negotiations failed to reach an agreement and this drove the pair up over 0.6680 (under 1.4970) for a short time. At the eleventh hour however, the basis of an agreement was reached and the Euro reacted somewhat positively retracing its losses. But any gains in the Euro have been limited by the lack of detail in the agreement and the fact it’s really only just bought more time, four months to be exact, before we are back at square one. I would expect to see support around 0.6500 (resistance around 1.5385) contain any periods of weakness in the pair over the coming weeks. With little real progress made on the Greek situation further Euro weakness and a test back up over 0.6700 (under 1.4925) remain a very real possibility for this pair. From New Zealand this week we get a speech from Governor Wheeler along with the trade balance, building consents, and business confidence data. From Europe this week we have ECB President Draghi due to speak along with data on German inflation, German unemployment, and French consumer spending.

DIRECT FX Current level Support Resistance Last wk range
NZD / EUR 0.6640 0.6500 0.6700 0.6575 - 0.6687
EUR / NZD 1.5060 1.4925 1.5385 1.4955 - 1.5209

 NZD/YEN

It has been a very quiet week for this pair with listless trading within a tight range. Key resistance around 90.00 has capped the topside and while that remains the case there is potential for a pullback toward 88.00 to develop. Be wary of a sustained break above 90.00 however, as this would open the way for a move back to 92.00 or even 94.00. From New Zealand this week we get a speech from Governor Wheeler along with the trade balance, building consents, and business confidence data. While from Japan we have household spending, inflation, industrial production, and retail sales data to digest.

DIRECT FX Current level Support Resistance Last wk range
NZD / YEN 89.50 88.00 90.00 88.62 - 90.08

AUD/USD

We have seen little overall direction for this pair over the past week. Prices have been trading within a 100 point range below the key resistance level of 0.7850. That is likely to remain the case heading into tonight’s important testimony from Fed Chair Yellen. This event has the potential to spark a broad move in the value of the US dollar. The market will be looking for any indication as to whether the Fed are likely to hike interest rates in June or not, and that expectation will drive the USD in the near term. The 0.7850 resistance level remains key. A sustained break above there would open the way for a much broader correction back to 0.8000. If Yellen suggests the Fed remain on course to hike interest rates in June the Australian dollar will likely see pressure and target the recent cycle lows toward 0.7600.

DIRECT FX Current level Support Resistance Last wk range
AUD / USD 0.7803 0.7630 0.7850 0.7751 - 0.7849

AUD/GBP (GBP/AUD)                            

The Australian dollar has been largely range bound between the broad parameters of 0.5000 and 0.5100 (2.0000 and 1.9608) to the UK Pound over the past two weeks. The failure to sustain a move up through 0.5100 (down through 1.9608) has seen the pair pull back to 0.5050 (1.9802) over the past 24 hours and the risks remain skewed to further weakness in the near term. Another test of 0.5000 (2.0000) could easily eventuate over the coming days, although there is nothing so far to suggest a continuation of the longer term downtrend is developing. We will more likely see a further period of ranging in the near term. The main focus in Australia this week will be on private capital expenditure data due out on Thursday. While from the UK we have mortgage approvals, the Nationwide house price index, the second estimate of GDP, and preliminary business investment data.

DIRECT FX Current level Support Resistance Last wk range
AUD / GBP 0.5050 0.5000 0.5100 0.5022 - 0.5109
GBP / AUD 1.9802 1.9608 2.0000 1.9575 - 1.9910

AUD/EURO (EURO/AUD)

This pair is currently trading not far from where it was this time last week. We have seen some volatility on the back of discussions between Greece and the EU which drew most of the attention of the past seven days. The Euro came under pressure late last week as negotiations failed to reach an agreement and this drove the pair up over 0.6940 (under 1.4409) for a short time. At the eleventh hour however, the basis of an agreement was reached and the Euro reacted somewhat positively retracing its losses. But any gains in the Euro have been limited by the lack of detail in the agreement and the fact it’s really only just bought more time, four months to be exact, before we are back at square one. I would expect to see support around 0.6700 (resistance around 1.4925) contain any periods of weakness in the pair over the coming weeks. With little real progress made on the Greek situation further Euro weakness and a test toward 0.7000 (1.4286) remains a very real possibility for this pair. The main focus in Australia this week will be on private capital expenditure data due out on Thursday. While from Europe this week we have ECB President Draghi set to speak along with data on German inflation, German unemployment, and French consumer spending.

DIRECT FX Current level Support Resistance Last wk range
AUD / EUR 0.6882 0.6700 0.6900 0.6789 - 0.6948
EUR / AUD 1.4531 1.4388 1.4925 1.4393 - 1.4730

AUD/YEN

The Australian dollar has seen a very slight upside bias against the Japanese Yen recently. The pair again tested levels above 93.00 this past week briefly trading to 93.54 before correcting lower. With support now seen around 92.00 the pair could easily build a base for another test higher. It is slow going however, and those looking to purchase Yen should take advantage of any periods of strength in the cross. A range of 92.00 to 94.00 should contain the pair over the coming week. The main focus in Australia this week will be on private capital expenditure data due out on Thursday. While from Japan we have household spending, inflation, industrial production, and retail sales data to digest.

DIRECT FX Current level Support Resistance Last wk range
AUD / YEN 92.80 92.00 94.00 91.69 - 93.54

AUD/CAD

The Australian dollar has made gains against the Canadian dollar this week. Mixed data from Canada has only served to reinforce expectations that we will see another interest rate cut from the Bank of Canada when they meet in March. This is keeping pressure on the Canadian dollar and it is unlikely a speech from Governor Poloz tomorrow or inflation data on Friday will alter that. From Australia this week we have private capital expenditure data due out on Thursday and this will be the main focus domestically. Support around 0.9700 should contain any near term weakness with the risks skewed toward an eventual test back up over 0.9900.

DIRECT FX Current level Support Resistance Last wk range
AUD / CAD 0.9810 0.9700 0.9900 0.9664 - 0.9846

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Market commentary:

The agreement reached between Greece and the EU has generally been received positively by the markets. The reality is the agreement, at least at this stage, is very short on detail and we now have another major deadline to look forward to in four months. Greece’s debt pile is largely unsustainable and the chance of meaningful growth in their economy is very limited with the crushing austerity imposed on the country. The EU has done exactly what it has been doing since the crisis developed five years ago. That is to ‘kick the can down the road’ by taking no decisive action now and push the problem into the future. It’s hard to see how this is helping the Eurozone move forward. Fed Chair Janet Yellen’s semi-annual testimony before a senate committee tonight is the major focus for the markets this week. Recent US data has suggested something of a slowdown in economic activity and there were hints in the FOMC minutes that the Fed could hold off hiking interest rates in June. This testimony tonight could be key in shaping market expectations.

Australia

It has been a very quiet week for economic releases from Australia. There has been nothing of substance released since the Reserve Bank of Australia’s minutes last Tuesday. We do however have a couple of releases this week to draw focus. The highlight will be private capital expenditure data due out on Thursday. The market is expecting a result of -1.3% for the quarter. Ahead of that tomorrow we also have construction work done and the wage price index to digest.

New Zealand

We have seen only a couple of minor release from New Zealand since last Tuesday night’s positive dairy auction. The first was producer prices that came in weaker than forecast at -0.4%. This data was for the fourth quarter of last year and was driven lower by the previous decline seen in dairy products and oil. The second was credit card spending numbers that hit the wires yesterday. Credit card spending was up 1.9% in January after a drop of 0.5% in December. Year on year card spending is now 6.2% higher. There was little market impact from either release. The discovery of fruit files in Auckland has the potential to impact NZ exports and the value of the New Zealand dollar to a degree. It would have to be a major widespread infestation for that to happen and so far that doesn’t seem the case. Later this week we have the trade balance, building consents, and business confidence data to draw focus.

United States

The past week has provided mostly disappointing data releases from the United States. Almost all of the regional manufacturing indexes have declined somewhat which suggests a broad drop off in activity. This won’t be helped by the very cold weather hitting parts of the country at the moment. Housing starts, building permits, and existing home sales have also all declined. Taking it all into account it seems very likely growth in the first quarter will be lower than forecast. This will only serve to reinforce the growing expectation that the Fed may hold off tightening in June, preferring to wait and see evidence of a pickup in growth and inflation. Last week’s FOMC minutes suggested as much, and if the data continues to come in softer than forecast, rate hike expectations will get pushed out into late 2015. The US dollar is going to find it difficult to make further gains in this environment. This week however could prove key in shaping expectations around just when the Fed will begin to hike interest rates. Tonight we have a semi-annual testimony by Fed Chair Janet Yellen to digest. Then later in the week we get new home sales, inflation, durable goods orders, and GDP data.

Europe

Greece’s new Syriza party came into power recently talking a very tough game. Their rhetoric continued in the lead up to negotiations with the EU, saying they would never accept an extension of the current bail-out programme that has imposed crushing austerity on the Greek economy. On Friday they agreed to an extension of the current bailout programme, including the austerity measures. Syriza’s leader Tsipras went on TV to tell Greek citizen’s they had “won a battle” if “not the war”, but nothing could be further from the truth. The Irish finance minister summed it up best when he said “Their political problem is that this is a reversal of their election position. There is absolutely nothing on the table that could be considered a concession.” It is an embarrassing back down by Syriza who are bound to see a political backlash as a result. The four month bailout extension is contingent on acceptance by the EU of a list of further reforms that Greece will make. So although Europe may have taken a step back from a messy Greek exit in the near term, very little has actually changed. Greece is still burdened by an unsustainable mountain of debt, and there is little chance of their economy being able to grow in any meaningful way. In terms of data late last week we saw the service sector PMI reading for Europe improve a touch. This was offset however by manufacturing PMI which decreased a few points. Last night we also saw the latest reading from the German IFO business climate index. It fell a touch from the previous reading with the IFO saying it shows domestic demand has weakened slightly. ECB President Draghi is due to speak this week and we also get data on German inflation and unemployment, along with French consumer spending.

United Kingdom

The UK released some encouraging employment data last week which showed the unemployment rate dropping and wages rising. Unfortunately Friday’s release of retail sales wasn’t so positive. Retail sales for January fell 0.3% which was bigger than the forecast for a 0.1% fall. The previous reading was also revised down a touch. Although this made for disappointing reading it is only one month’s number and year on year sales are still looking much better. Still to come this week we have mortgage approvals, the Nationwide house price index, the second estimate of GDP, and preliminary business investment data.

Japan

The Bank of Japan’s monetary policy statement held no real surprises last week with the bank maintaining a cautiously optimistic tone. The bank would have been encouraged by Thursday’s trade balance data that showed a dramatic fall in the trade deficit. Surging exports and falling oil prices have helped to cut Japan’s trade deficit by more than half. Unfortunately what didn’t make such good reading was manufacturing PMI which declined to 51.5 in January. That is a seven month low. The Bank of Japan minutes released yesterday had no market impact. They said members agreed the Japanese economy was gradually recovering and that exports should continue to pick up on the back of the global economy and weaker Yen. Oil price declines are however creating uncertainty around the ability to meet the inflation target in the 2015 financial year. Later this week we have household spending, inflation, industrial production, and retail sales data to digest.

Canada

We saw some very mixed data from Canada last week. Wholesale sales were very strong printing at +2.5% against expectations of just +0.4%. But these were countered by Friday’s release of retail sales that came in down 2.0% versus expectations for only a 0.3% fall. The core reading which excludes autos was even weaker. This data was weak enough to cement market expectations for another 0.25% interest rate cut from the Bank of Canada (BOC) at next month’s meeting. BOC Deputy Governor Agatha Cote was on the wires late last week saying the January cut was intended to provide insurance against downside risks to inflation, and that the March 4th rate decision will be based on a careful examination of the economy and how risks are evolving. We will hear from Governor Poloz tomorrow and then on Friday we get the latest inflation data.

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

 

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