EU ministers reject Greek austerity plan as insufficient, knocking equity markets lower and spurring widespread risk aversion

By Mike Jones

NZD

The NZD/USD spent most of last week consolidating in a sideways 0.8290-0.8400 range. This coincided with a pause in the surge in risk appetite that has carried the currency higher in the past few weeks.

However, on Friday, the NZD lost a little of its lustre. Worries about a Greek default again cast a pall over global markets.

EU finance ministers rejected the latest Greek austerity plan as insufficient, knocking equity markets lower and spurring widespread risk aversion.

Our risk appetite index (scale 0-100%) slipped from above 58% to around 52%. Renewed demand for “safe-haven” assets undermined the “risk sensitive” NZD. NZD/JPY skidded from 64.80 to around 64.20 and the NZD/USD fell around ½ cent to 0.8270.

NZ economic momentum remains subdued, with last week’s meagre 0.1% quarterly employment gain the latest example. As such, the prospects for further short-term NZD/USD gains rest with the global backdrop.  We’d suggest there is less room for further marked improvement on this front.  Investors are already pricing in a relatively benign outcome for the Greek crisis. And risk aversion indicators and currency volatility are already around multi-month lows. Nor should we forget that the NZD/USD remains more than 1½ standard deviations above the mid-point of our valuation model’s NZD/USD “fair-value” range (of 0.7500-0.7800). This all suggests a reduced likelihood of further marked NZD/USD gains in  coming weeks.

However, in the short-term, developments in the Greek crisis will continue to provide direction for risk appetite and the NZD. In this regard, keep an eye on the EU finance ministers meeting on Wednesday. If agreement is reached on the next Greek bailout package, we’d expect a pop higher in “risk-sensitive” assets like the NZD. Still, a break of resistance at 0.8405 may well be a bridge too far.

There are also a few NZ bits and bobs to keep an eye on this week. We’re expecting Wednesday’s Q4 retail volumes to register a 1.0% increase, above market expectations of 0.8%. Thursday’s Fonterra auction, BNZ PMI, ANZ jobs ads and ANZ-RM consumer sentiment will be a test of more recent resolve, which should probably all pass muster.

Also watch for January’s nationwide housing statistics – in the form of Tuesday’s QVNZ report and the REINZ variety that will probably be released before the week is out.

Majors

Investors’ risk appetite faltered on Friday after EU finance ministers failed to approve the €3.3b Greek austerity deal. Equity markets sold off, risk aversion increased, and “safe-haven” currencies like the JPY and USD outperformed. 

On Friday, EU leaders demanded not only an extra $325m in budget cuts from Greece, but also proof that cuts are being implemented. Greece needs the EU signoff to obtain the next tranche of bailout cash. Further delay and uncertainty on this front took a clear toll on sentiment on Friday. European equity markets tumbled 0.7-1.7%. US stocks also fell, with some less than inspiring US economic data also weighing (US consumer confidence and trade figures both undershot market expectations).

The S&P500 closed down 0.7% and the VIX index (a proxy for risk aversion) jumped from 18.5% to over 20.5%. Against a backdrop of equity market weakness and rising risk aversion, investors flocked back to the relative “safe-haven” of the USD and JPY. The EUR/USD slipped below 1.3200 from above 1.3280 earlier in the night. Meanwhile, the “risk-sensitive” AUD and CAD notched up losses of 1% and 0.7% respectively against the firming USD.

Greece looks set to remain in focus this week. The Greek parliament is currently voting whether to approve the latest batch of austerity measures. We should get the result sometime today. It seems likely the vote will be passed, which could provide some near-term relief for risk appetite. However, the more important announcement will come on Wednesday when EU finance ministers will decide whether to approve the latest bailout deal for Greece.

Elsewhere, a slew of data and events will provide an update on the health of the global economy. Japanese and Eurozone GDP figures for Q4, UK and US CPI, the German ZEW survey, Australian employment data, and January FOMC minutes will all receive plenty of attention.

All up, it looks like it’s going to be another choppy ride in currency markets this week, with Greek headlines again providing most of the direction. Near-term support on the USD index is seen around 78.35 with resistance expected on bounces towards 79.50.

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