EU leaders harden attitudes toward Greece; positive US data ignored; markets well priced for more NZ rate cuts

By Raiko Shareef

Markets traded in fairly quiet fashion on Friday, ahead of what should be a fairly eventful week.

The June FOMC meeting is the last full-blown affair before a possible rate hike in September.

The Eurogroup meeting of finance ministers is seen as pivotal for Greece’s odds of striking a deal, after staff-level talks failed last night. EUR has opened 50 pts lower this morning as a result.

Despite a continued positive beat from US data, the USD failed to improve markedly on Friday. The strong (and market-beating) bounce in the Univ. of Michigan’s consumer sentiment survey likely would have, on other days, inspired a fairly robust USD reaction. But the market was inclined to ignore it, and the USD finished flat at an index level, and mixed against its peers.

We note that the Citi’s widely-followed US economic surprise index has recovered to -33, its best since mid-February, having mostly wallowed below -50 since March.

Over the weekend, staff-level talks to bridge the gap between Greece and its creditors ended without success. Some eurozone officials described these talks as a “last try”, ahead of a Eurogroup meeting on Thursday.

The mood music from Brussels is increasingly grim, after the IMF withdrew its technical staff from negotiations last week, citing a lack of progress.

European leaders appear to be hardening their positions, as Greece continues to put forward proposals that its creditors regard as unrealistic. Greece needs to unlock funding before repayments come due at month’s end.

NZD trailed the G10 leader-board for a second day, after the RBNZ’s OCR cut on Thursday. NZD/USD spent a decent amount of Friday’s session getting familiar with a 0.69 handle. From here, we believe NZD will struggle to head lower on RBNZ expectations alone, with the market relatively well-priced for future rate cuts. The broader USD will take the driver’s seat from here. We are wary of a modest squeeze higher in NZD/USD, eyeing the record net short position established by the speculative community ahead of the RBNZ last week.

We do not expect any explicit signal of imminent rate hikes from the FOMC on Thursday (let alone a rate hike on the day). But we anticipate Fed Chair Yellen will be fairly constructive on the economic outlook, and suspect the market is priced for such an outcome.

A swathe of second-tier US data is due tonight. The RBA’s Chris Kent is delivering a speech, which will be the highlight of the local session.

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Raiko Shareef is on the BNZ Research team. All its research is available here.