Greek PM’s pleas for austerity programme extension have fallen on deaf ears

By Mike Jones

NZD

You can’t fight the Fed. That was the main message in markets last week. USD selling in the wake of the dovish Fed minutes kept the NZD/USD supported above 0.8100.

It’s becoming a familiar theme. Worries about a quickening pace of global slowdown were again offset by hopes of additional central bank stimulus last week.

The July Fed minutes essentially put the market on notice for further easing. And an expectation the PBOC will ride to the rescue of the Chinese economy prevented a calamitous market reaction to the awful HSBC Flash PMI.

The upshot was that risk appetite held up – our risk appetite index remains around 70% ­­– and the USD continued to suffer from sliding relative yields. Indeed, NZ-US 3-year swap differentials crept up to 235bps last week, limiting NZD/USD dips to around 0.8080.

Nonetheless, if you take a step back from the near-term chop, the NZD/USD has spent the past month essentially drifting sideways in a narrow 0.8020-0.8230 range. This reflects the global cross winds at play. Investors are still a little unsure which way the global economy is going to break.

This week’s Jackson Hole Economic Symposium may offer up some important clues in this regard. Many of the big guns are speaking (Fed chairman Bernanke is headlining) so we may see some important headlines and market reaction. However, the conference doesn’t kick off until the end of the week so familiar ranges will likely contain the NZD/USD until then. Last week’s 0.8055-0.8195 range is a good starting point.

New Zealand’s upcoming data week will gravitate toward Thursday’s NBNZ business survey. Recall that it steadied surprisingly nicely in July, with net confidence at +15 and own-activity expectations at +24. That was consistent with GDP growth of around trend and, thus, our macro forecasts too. We don’t anticipate any major deviations in August’s survey. For the market, a sharp fall would likely prompt the most reaction as local interest rate markets again move to price RBNZ cuts.

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Majors

Rising ‘safe-haven’ demand saw the USD strengthen against most of the major currencies on Friday night.

The post Fed-minutes rally in risk assets appear to run out of steam as attention lurched back towards Europe. Investors were spooked by reports the German finance ministry was mulling a “temporary” Greek exit from the Eurozone.

European sovereign bond spreads moved higher, indicative of worsening sentiment towards Europe. Commodity prices eased, while equity markets were a little mixed. In currency markets, investors took advantage of the less optimistic global backdrop to take profit on last week’s USD slide. The EUR/USD, GBP/USD, and AUD/USD declined between 0.3-0.4% as ‘safe-haven’ flows against bolstered the USD.

It’s worth noting, the latest round of top-level European meetings have wound up with little new support being offered for Greece. So far, the Greek PM’s pleas for an austerity programme extension have fallen on deaf ears.

The weekend’s press is full of such reports. As a result, we wouldn’t be surprised to see Friday’s more circumspect attitude towards ‘risk’ assets continue into the early part of the week.

However, the week ahead is of course all about the Fed’s Jackson Hole conference, due to kick off on Friday. Headlining will be Fed chairman Bernanke, although there is a bunch of other central bank and policy officials also queuing up for the mic.

We suspect some of the market impact of Bernanke’s speech has been nullified by last week’s dovish Fed minutes. The speech is expected to be used to map out the policy (easing) options facing the Fed. If this has the effect of hardening Fed easing expectations then the USD should continue to suffer.

In the lead up to Jackson Hole, the US prints their second reading of Q2 GDP, the Fed’s latest Beige Book, and a bunch of consumer data. Perhaps more attention is due on Germany.  Further decline in tonight’s IFO survey would point to a stalling in the German economy in Q3. There is also German retail, unemployment and inflation readings to watch for through the week.

All up, we expect investors will be a little reluctant to dip their toes in the water ahead of Jackson Hole. This may keep currencies range-bound in the short-term. The 81.20-81.90 range should contain the USD index for today.

Other News: US durable goods orders +4.2%m/m in July (+2.5% expected) but ex-transport weaker at -0.4%. UK Q2 GDP revised to -0.5%q/q from -0.7% previously (as expected)

Event Calendar: 27 August: GE IFO; US Fed’s Evans speaks; US Fed’s Pianalto speaks; US Dallas Fed index; ECB’s Asmussen speaks; 28 August: AU home sales; US consumer confidence; US Richmond Fed index; 29 August: AU construction; US Q2 GDP; US pending home sales; US Fed Beige Book 30 August:NZ building permits; NZ NBNZ business confidence; JN retail trade; AU Capex; AU building approvals; GE unemployment; US personal income & jobless claims; 31 August: JN CPI & jobless rate; EU CPI; ECB’s Coeure & Nowotny speak; US Fed’s Bernanke speaks at Jackson Hole Economic Symposium.

All its research is available here.