by Mike Jones
NZD
Champagne corks are being put back in their bottles in Europe as the initial optimism over yesterday’s Greek election fades.
Despite this, the NZD broadly held up overnight thanks to some aggressive NZD/EUR buying.
The NZD/USD spent most of the night consolidating in a tight 0.7890-0.7940 range.
Greece’s time in the sun didn’t last for long. Overnight, focus has shifted back to Spain and the soaring borrowing costs faced by the government.
Spain’s 10-year government bond yield breezed through 7%, the same level that eventually necessitated bailouts for Portugal and Greece.
In addition, German chancellor Merkel reminded investors of the herculean task facing Greece.
Equity markets and the EUR surrendered early gains as doubts about the plight of the euro zone resurfaced. More than 1½ cents was carved off the EUR/USD as the night wore on, underpinning a bounce in the USD.
However, the AUD and NZD were insulated from the effects of the stronger USD thanks to solid NZD/EUR and AUD/EUR buying. NZD/EUR leapt from 0.6230 to 2-month highs above 0.6300.
We’ve been looking for a return to 0.6200 ever since the NZD/EUR fell to 0.5900 in late May. From here, we expect some consolidation in an elevated 0.6150-0.6350 range.
While NZ economic momentum remains resilient, forward indicators of European growth have taken a turn for the worse. Indeed, the latest PMIs are consistent with a deepening European recession. While political noise will continue to cause volatility, the economic ‘fundamentals’ are highly supportive of the NZD/EUR. Our year-end forecast is 0.6300.
There is nothing on the local data calendar today. Across the Tasman, the RBA minutes may turn a few heads. These could be a little more positive if Governor Stevens’ recent ‘glass half full’ rhetoric is anything to go by. Near-term resistance on the NZD/USD is expected towards the 200 day m.a at 0.7955. Initial support is seen at 0.7880.
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Majors
As with the Spanish bank bailout last week, the good cheer over the Greek election result has quickly fizzled.
Yesterday’s knee-jerk EUR rally has reversed, paving the way for a broad strengthening in the USD. Indeed, on a trade-weighted basis, the greenback has bounced back over 1% from yesterday’s lows.
As Greek politicians begin the process of forming a government, market attention has quickly shifted back to Spain’s soaring borrowing costs. 10-year government bond yields surged through the 7% level overnight amid whispers a further €150b may be needed to prop up the Spanish banking system. Rumours the ECB was checking rates ahead of a possible restart of its sovereign bond buying programme did little to help sentiment.
After a buoyant open, European stocks were soon back-peddling. The Spanish IBEX closed down 2.95% after opening 2% higher. US stock indices are flat to down.
The fading risk rally and deteriorating European sentiment took a clear toll on the EUR/USD. From almost 1.2750, the single-currency skidded back below 1.2600, dragging most of the majors lower. The GBP, CAD, and CHF slipped 0.3-0.5% against USD. In contrast, the AUD and NZD managed to buck the trend of a stronger USD thanks to some heavy AUD/EUR and NZD/EUR demand.
Looking ahead, we doubt the G20 meeting (currently underway) will produce any firm action plan or policy measures. World leaders are likely to reaffirm their commitment to a strong Europe and increase loans to the IMF. But investor hopes for extra stimulus are likely to be dashed. As a result, the gloomy mood pervading markets may continue in the lead up to Thursday morning’s all important FOMC meeting. We suspect the EUR/USD will be unable to sustain bounces towards 1.2650. Support on the USD index at 81.20 should hold.
Other news:
China Home Prices drop 0.2%m/m in May (-2.0% y/y), the 9th straight monthly drop. Germany’s Merkel again says Greece must stay the course on austerity reforms and plays down the chances of another (third) bailout package for Greece.
Event Calendar:
19 June: RBA Board minutes; UK CPI; US housing starts; GE ZEW; G20; 20 June: NZ dairy auction; FOMC meeting & Bernanke speaking; NZ current account; UK BoE minutes; 21 June: Eurogroup meeting; European PMIs; Auditors publish Spanish banks’ recap needs; NZ GDP; US jobless claims; US Phillie Fed; 22 June: NZ bus confidence; NZ credit cards; EU finance minister; GE IFO; EU leaders meet.
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