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Dramatic increase in volatility; Chinese sharemarket carnage sees PBOC cut rates; Greek situation a mess and they will surely default

Currencies
Dramatic increase in volatility; Chinese sharemarket carnage sees PBOC cut rates; Greek situation a mess and they will surely default

By Ian Dobbs*:

The second half of 2015 looks like it could be a wild ride.

Volatility in financial markets is picking up dramatically and we haven’t even made it to the Fed’s first interest rate hike yet.

The major focus in the past few days has been on Greece, but you can’t ignore what’s going on in China at the moment either.

Chinese stocks fell more than 7% (wiping $668 billion off market value) on Friday alone, which prompted dramatic cuts from the Chinese central bank over the weekend.

The People’s Bank of China (PBOC) cut its benchmark interest rate, but also eased reserve requirements. The last time they took both measures at once was in 2008.

The Greek situation is a mess. PM Tsipras walked away from negotiations on Friday and, without informing anyone first, called for a referendum. Greece has now introduced capital controls and Greek banks will be closed for up to six days as ATM machines ran dry across the country over the weekend.

Greece will almost certainly default on its EUR 1.6bn payment due today to the IMF, and their current bailout programme also expires today.

The Euro was initially hit hard, European stock look shaky and risk aversion is sweeping the markets. It looks like the fun has only just begun.

Major Announcements last week:

  • US Durable Goods Sales +.5% vs +.6% expected
  • US New Home Sales .546m vs .525m expected
  • China’s PBOC lower in rates and cut RRR requirements
  • US Q1 GDP -.1% as expected
  • NZ Trade Balance 350M vs -100m expected
  • Japanese Retail Trade 3.0% vs 2.3% expected

NZD/USD

The New Zealand dollar traded to a fresh cycle low against the USD at the start of this week, weighed on by risk aversion in the wider market. The Greek situation prompted a wave of ‘risk off’ selling early on Monday morning and this saw the NZD trade down below 0.6900. The local currency was already trading heavily heading into the weekend thanks to Friday’s dramatic fall in the Chinese stock market. With both situations far from contained, we can expect further volatility over the coming week. Major trend resistance is now seen around 0.6980, and while below that level the longer term risks remain to the downside. From NZ this week we still have a dairy auction to digest, while from the US we have manufacturing PMI and non-farm payrolls data to draw focus.

DIRECT FX Current level Support Resistance Last wk range
NZD / USD 0.6811 0.6780 0.6980 0.6789 - 0.6924

NZD/AUD (AUD/NZD)

With no key data released from either country recently, this pair has been driven by volatility in the wider market. In early trade yesterday morning as both the NZD and AUD were seeing pressure on the back of risk aversion thanks to the Greek situation, the cross briefly traded as high as 0.8978 (lows 1.1138). Since then we have seen a steady NZ dollar decline back toward 0.8900 (1.1235). If we were to see further dramatic falls in Chinese stock markets, this would weight on the Australian dollar more than the New Zealand currency, and the pair could test back toward 0.9000 (1.1110). The Chinese central bank's decision to easy aggressively over the weekend should provide some, at least temporary, respite for Chinese stocks and the AUD. With that in mind we are likely to see further ranging between 0.8850 and 0.9000 (1.1110 - 1.1300) over the coming days. One must be mindful however, of the increased volatility seen in markets recently and the potential for unforeseen events to dramatically impact prices.

DIRECT FX Current level Support Resistance Last wk range
NZD / AUD 0.8890 0.8850 0.9170 0.8851 - 0.8978
AUD / NZD 1.1249 1.0905 1.1299 1.1139 - 1.1298

NZD/GBP (GBP/NZD)

The New Zealand dollar’s bounce from recent lows against the UK Pound that started mid last week, quickly fell victim to events in the wider market. Friday’s dramatic fall in Chinese stocks saw the NZD under some pressure heading into the weekend, then as Greek negotiations unravelled and PM Tsipras called a referendum, risk aversion pressured the local currency further early yesterday.  The NZD briefly traded to fresh cycle lows at 0.4326 (2.3116) to the Pound, before staging a small recovery overnight. There is still a lot of uncertainty around the Greek situation and this should limit potential NZD upside over the coming week. Look for minor resistance just above 0.4400 (support 2.2730) to contain any near term NZ dollar gains. We still have another dairy auction from Fonterra to digest this week, while from the UK we get PMI’s from the manufacturing, construction and service sectors.

DIRECT FX Current level Support Resistance Last wk range
NZD / GBP 0.4335 0.4300 0.4500 0.4326 - 0.4410
GBP / NZD 2.3068 2.2222 2.3256 2.2675 - 2.3115

 NZD/CAD

We have seen some volatile trading over recent days, and the road ahead looks to be just as rough. The New Zealand dollar saw some pressure heading into the weekend on the back of a dramatic fall in the Chinese stock market. Greece then stole the headlines on Saturday after negotiations broke down and PM Tsipras called a snap referendum. That caused a wave to risk aversion to sweep the market in early trade yesterday, which pressured the NZD further. The NZD briefly traded to fresh cycle lows against the CAD at 0.8381, before staging something of a recovery overnight. The risks remain skewed to the downside with uncertainty around Greece likely to remain until at least early next week. Resistance around 0.8570 should cap any periods of strength in the pair and further test below 0.8400 can’t be ruled out. From NZ we have another Fonterra dairy auction to digest this week, while from Canada we get the latest reading of GDP on Wednesday.

DIRECT FX Current level Support Resistance Last wk range
NZD / CAD 0.8460 0.8370 0.8570 0.8381 - 0.8570

NZD/EURO (EURO/NZD)

It has all been about Greece and the EUR the past few days, with events there largely side-lining everything else in the market. PM Tsipras’ surprise call for a referendum over the weekend shook markets and saw the EUR marketed dramatically lower in early trade yesterday morning. That helped drive the pair up to 0.6232 (down to 1.6046),, but since then we have seen a very impressive EUR recovery and the pair is now back down below 0.6100 (above 1.6395). That EUR recovery in the past 24 hours looks to have had as much to do with market positioning as anything else. It seems the Swiss National Bank (SNB) triggered something of a Euro “short squeeze” last night after they intervened in the market to weaken their currency by selling CHF and buying EUR. It seems unlikely we will see much further EUR strength in the near term, at least until the result of the referendum is known. Making bold predictions in this current volatile environment is however fraught with danger. Resistance toward 0.6200 (1.6130) and support toward 0.6000 (1.6666) mark the initial parameters for trade in the coming days.

DIRECT FX Current level Support Resistance Last wk range
NZD / EUR 0.6090 0.6000 0.6200 0.6051 - 0.6232
EUR / NZD 1.6420 1.6129 1.6667 1.6045 - 1.6526

 NZD/YEN

Risk aversion in the wider market has been the main driver of this pair in recent days. In time of heightened market uncertainty the NZDJPY tends to come under pressure and that was certainly what we saw early yesterday morning. The pair traded sharply lower touching 83.00 before staging something of a recovery. Uncertainty around the Greek situation drove the move and it seems unlikely to be resolved until at least after this weekend’s referendum. That should help to limit NZDJPY gains. Initial resistance comes in around 84.60 and that level may well cap the topside over the coming days. Further investigation below 83.00 can’t be ruled out if developments unfold negatively in regard to Greece.

DIRECT FX Current level Support Resistance Last wk range
NZD / YEN 83.45 82.60 84.60 83.00 - 85.67

AUD/USD

The Australian dollar has lost ground to the USD this week weighed on by declining Chinese stocks and risk aversion in the wake of the Greek referendum announcement. The pair briefly traded below 0.7600 in early trade yesterday, although we did see a good bounce from there overnight. The one thing we can be sure about is that there is plenty of potential for further volatility over the coming week. If we get a sustained break below 0.7600, then the target will be a test of cycle lows at 0.7530. While support around 0.7600 contains the downside, expect further ranging between there and 0.7850. RBA Governor Stevens is due to speak tonight, then later in the week from Australia we get building approvals, the trade balance and retails sales data. From the US we have manufacturing PMI and the all-important non-farm payrolls data to draw focus.

DIRECT FX Current level Support Resistance Last wk range
AUD / USD 0.7663 0.7600 0.7850 0.7590 - 0.7762

AUD/GBP (GBP/AUD)                            


The Australian dollar started to see pressure late last week on the back of dramatic falls in Chinese stocks. Against the UK Pound, this drove the cross to fresh cycle lows below 0.4869 (highs 2.0538) heading into the weekend. Greek developments then took centre stage and wider market risk aversion pressured the AUD further. Eventually a low of 0.4839 (high 2.0665) traded early yesterday. We have seen a small bounce from there but it’s been less than convincing and the risks remain skewed to the AUD downside. Resistance around 0.4940 (support 2.0243) looks likely to cap any near term Australian dollar strength for the time being. It would take a move above that level to change the current bearish (negative) outlook. RBA Governor Stevens is due to speak tonight, then later in the week from Australia we get building approvals, the trade balance and retails sales data. While from the UK we have PMI’s from the manufacturing, construction and service sectors to digest.

DIRECT FX Current level Support Resistance Last wk range
AUD / GBP 0.4875 0.4740 0.4940 0.4839 - 0.4938
GBP / AUD 2.0513 2.0243 2.1097 2.0250 - 2.0666

AUD/EURO (EURO/AUD)

Greece, and the Euro, have taken centre stage since the weekend’s surprise announcement about a referendum on the bailout package. The Euro has seen some big ranges trade and it seems likely we are very far away from any finality on the issue. The market will remain nervous in the meantime and further volatility is expected. The levels of 0.6800 to 0.7000 (1.4285 - 1.4705) look likely to provide the initial parameters on the week, although making any predictions in the current environment is fraught with danger. The Australian dollar will also be keeping one eye on the Chinese stock market which saw dramatic losses late last week. These pressured the AUD heading into the weekend and although the policy easing’s by the People’s Bank of China may help in the near term, Chinese stocks remain vulnerable.

DIRECT FX Current level Support Resistance Last wk range
AUD / EUR 0.6850 0.6800 0.6930 0.6807 - 0.6981
EUR / AUD 1.4599 1.4430 1.4706 1.4324 - 1.4691

AUD/YEN

The AUDJPY broke out of its recent range in dramatic fashion early yesterday morning. Weak Chinese stocks had weighed on the AUD heading into the weekend and this had driven the pair toward the lower bound of the range at 94.50. Greek developments then took centre stage and risk aversion was the theme early on Monday. This saw the AUDJPY snap lower to touch 92.79 before recovering somewhat. The pair has failed to get back above 94.50 however, and this keeps the focus on the downside. Expect further volatility over the coming days with a lot of uncertainty still around the long term future of Greece within the Euro. RBA Governor Stevens is due to speak tonight, then later in the week from Australia we get building approvals, the trade balance and retail sales data. While from Japan this week we have average cash earnings data along with the quarterly Tankan report.

DIRECT FX Current level Support Resistance Last wk range
AUD / YEN 93.91 92.50 94.50 92.79 - 96.11

AUD/CAD

It has been a very volatile past few days for this pair as events in the wider market drive price action. The Australian dollar saw pressure late last week as Chinese stock fell in dramatic fashion and this drove the AUDCAD down toward 0.9420 heading into the weekend. The focus then shifted to Greece and the surprise referendum announcement which caused a wave of risk aversion in early trading yesterday. That drove the pair to a 0.9374 low before a substantial bounce developed. For now the risks remain to the downside and I would expect resistance around 0.9600 to cap any further strength in the pair.

DIRECT FX Current level Support Resistance Last wk range
AUD / CAD 0.9525 0.9400 0.9600 0.9374 - 0.9595

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Market commentary:

The second half of 2015 looks like it could be a wild ride. Volatility in financial markets is picking up dramatically and we haven’t even made it to the Fed’s first interest rate hike yet. The major focus in the past few days has been on Greece, but you can’t ignore what’s going on in China at the moment either. Chinese stocks fell more than 7% (wiping $668 billion off market value) on Friday alone, which prompted dramatic cuts from the Chinese central bank over the weekend. The People’s Bank of China (PBOC) cut its benchmark interest rate, but also eased reserve requirements. The last time they took both measures at once was in 2008. The Greek situation is a mess. PM Tsipras walked away from negotiations on Friday and, without informing anyone first, called for a referendum. Greece has now introduced capital controls and Greek banks will be closed for up to six days as ATM machines ran dry across the country over the weekend. Greece will almost certainly default on its EUR 1.6bn payment due today to the IMF, and their current bailout programme also expires today. The Euro was initially hit hard, European stock look shaky and risk aversion is sweeping the markets. It looks like the fun has only just begun.

Australia

There has been no economic data of significance released from Australia over the past week. The Australian dollar has been influenced by events in China, as Chinese stocks enter bear market territory (down over 20% from their peak). This prompted a reaction from the People’s Bank of China who eased aggressively in order to limit the damage. The Chinese stock market has been in a bubble of epic proportions, driven largely by uneducated and unsophisticated investors. It’s a recipe for disaster and although the central bank action may temporarily halt the declines, there is plenty of room for further losses. Even after the recent 20% decline, Chinese stock are still up around 100% on the year. Further volatility is expected over the coming months. We do have some Australian releases to draw focus over the coming days. RBA Governor Stevens is due to speak tonight, then later in the week we get building approvals, the trade balance and retails sales data.

New Zealand

The past week has been a quiet one for economic data from New Zealand with Friday’s trade balance the only release of note. That did come in much better than forecast with a surplus of 350m. That’s the fifth surplus in a row. Imports were significantly lower than expected and that may not be such a great thing. There was a sharp fall in imports of capital equipment which is a sign of weak business investment. That’s could well weight on growth prospects going forward. Earlier this morning we saw the latest building consents data. Consents came in at flat against the previous fall of 1.7%. Later this afternoon we get business confidence numbers and then tomorrow night we have another dairy auction to digest. Offshore developments will continue to draw the most attention this week however, with massive uncertainty around Greece, and the health of the Chinese stock market.

United States

Data from the United States over the past week has been a little mixed, although generally supportive of the economic recovery going forward. Housing market indicators suggest there is plenty of momentum in that sector and Friday saw strong positive revisions to consumer sentiment. Weekly jobless claims remain at levels consistent with solid employment growth and that should be confirmed on Thursday night with the release of non-farm payrolls data. The market is expecting a reading of +270k which should serve to reinforce expectations for a September interest rate hike from the Fed. Other data to watch for this week includes Chicago PMI, manufacturing PMI and factory orders.

Europe

Greek PM Tsipras surprised almost everyone, including his own team of negotiators in Brussels, when he announced on Friday evening a snap referendum set for 5th July. No one really knows the exact wording of the question he will put to the Greek people, but it’s basically going to ask if Greece is willing to submit to creditors demands to release more bailout cash, or not. The problem is the current bailout programme actually expires at the end of today, and no one has said they’re willing to offer him an extension just so he can go ask voters to reject the entire thing. The time for a referendum would have been a few weeks ago. Funds have been fleeing the Greek banking system for weeks, but those outflows accelerated over the weekend. As a result Greece has been forced to introduce capital controls, part of which are that Greek banks remain shut until next week. In short the situation is a mess and a disorderly Greek default and Euro exit are starting to look like very real possibilities. Almost certainly, Greece will default on its payment of EUR 1.6bn due today to the IMF. The country may also be forced to make pension and salary payments with IOU’s. Europe has had plenty of time to prepare for this eventuality, but no one really knows just what contagion there may be. The financial markets do not like the uncertainty and risk aversion has been prevalent in trading since first thing Monday morning. As you would expect the initial reaction was for the EUR to lose significant ground, but somewhat surprisingly it turned around and squeezed higher last night. The risks remain skewed to the downside over the coming weeks if Greece does crash out of the currency union. Economic data from Europe will take a back this week as markets remain focused on how the Greek debacle unfolds.

United Kingdom

The past week has only seen a handful of second tier releases from the UK, all of which have come in below expectation. The underlying trend in most of these indicators is still very positive however. While the most recent mortgage approvals figures were softer than forecast, approvals have risen in four of the past six months and other housing market indicators suggest a pick-up in recent months. Net lending to individuals also disappointed printing at 3.1bn versus 3.3bn expected. But on a three month annualised basis, consumer credit rose at the fastest pace in almost ten years. UK households continue to spend and this will underpin the economic recovery going forward. Overall the data has had little impact, with events in the wider market drawing focus in recent days. Later in the week we have the trifecta of PMI’s from the manufacturing, construction and service sectors to digest.

Japan

Events in the wider market have been the major focus over the past few days and as such Japanese data has largely been side-lined. As is usually the case in times of increased volatility and uncertainty, the Yen will see appreciation as risk aversion dominates trading. That was certainly the case early Monday morning as the Yen gained ground across the board on the back of Greek fears. A huge amount of uncertainty remains around the potential for a Greek exit and as such the Yen is likely to see further periods of risk aversion (appreciation) over the coming week. In terms of actual data from Japan at the end of last week we saw inflation remain very subdued. Household spending was however, more encouraging jumping 4.8% year on year. That was backed up by retail sales figures yesterday which increased 3.0% versus 2.1% expected. Also released yesterday was the latest reading on industrial production and this didn’t make such great reading, coming in much weaker than forecast at -2.2%. This data has raised fears of a poor second quarter GDP figure and it certainly makes the Bank of Japan’s (BOJ) economic forecasts on growth and inflation a lot harder to reach. Still to come this week have average cash earnings data along with the quarterly Tankan report.

Canada

There has been no economic data of significance released from Canada over the past week. We did see the raw materials price index come in bang on expectation last night at +4.4%, but there was no market impact with attention squarely on the Greek situation at the moment. Tonight we get monthly GDP data and the market is looking for a reading of +0.1%. There is little else scheduled for release with a Canadian bank holiday on Thursday.

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

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