The AUD and NZD were the weakest performers on Friday. Their performance at the start of the week is unlikely to be helped by the Greek turn of event over the weekend. NZD/USD ended last week around 0.6850.
Markets appear to have been taken by surprise by the decision of the Greek government over the weekend to halt negotiations and call a national referendum.
On Friday, equity and credit markets had been relatively calm and Greek 10-year yields had actually dropped slightly from the previous day’s levels. The EUR/USD ended the week only slightly lower, at 1.1170.
However, the EUR/USD is unlikely to fare well at the start of the week as uncertainty reigns. In recent weeks the market’s central assumption appears to have been that Greece and its creditors would ultimately cobble together a (somewhat unsatisfactory) deal, at last minute. Weekend developments have now raised the probability of other outcomes, including Greece exiting the Euro.
The ECB’s main focus will now likely be to avoid contagion to other areas of the Eurozone. Watching other peripheral Eurozone bond spreads to German yields will provide some indications of contagion.
The NZD and AUD will also likely suffer today.
Despite our distance from the epicentre of the crisis, NZD and AUD are still perceived as ‘risk-sensitive’ currencies, and will be sold during times of financial uncertainty. Our NAB colleagues’ analysis shows, declines of 5-10% in high-beta currencies are not unusual, over a week of heightened risk aversion
Both the AUD and NZD were already on the back-foot on Friday. The AUD/USD slid from 0.7720, to end the week just below 0.7660. Support remains at the April lows of 0.7530, though it is easy to see how this could be tested this week.
The NZD/USD also declined into weekend. From 0.6890, it closed the week around 0.6850, nears its lowest levels since July 2010. It is difficult to see much near-term support for the currency if Eurozone events remain mired in uncertainty at the start of the week.
Over the weekend, the People’s Bank of China also announced a further 25bps interest rate cut and eased the RRR to a section of its banks. This appears to be timed to calm nerves in the wake of heavy falls in the Chinese equity market on Friday. In the past, if taken proactively, such rate cuts have been taken positively by the NZD and AUD, but in this case, the market may take a less benign view.
There are no key domestic data releases on either side of the Tasman today, so expect offshore sentiment to dominate market sentiment today.
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Kymberly Martin is on the BNZ Research team. All its research is available here.
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