Risks lurk in Greece, the euro and US labour markets. Carry trade opportunities overstated

By Raiko Shareef

The broader USD saw significant appreciation last night, driven by weakness in index-heavyweight EUR, which crack below important support at 1.0710.

This comes despite positive Greek developments overnight.

AUD and NZD once again outperformed, ostensibly on carry-trade attractiveness.

The IMF confirmed that Greece had made a €450m due yesterday. The next hurdle is a €420m treasury bill payment, due 14 April.

Analysts expect the Greek government will be able to find enough cash to meet that payment (by using cash reserves of public agencies, etc), but may struggle beyond that.

24 April is now the circled date on the calendar, when euro-zone finance ministers are set to meet to agree on a financing deal that will allow Greece to make much more substantial payments in May.

Greece received some reprieve yesterday, as its request for greater ECB liquidity was granted.

Despite all this, EUR/USD remained very weak throughout our session, and snapped through strong support at 1.0710 in the early hours of this morning. We’d attribute this to the growing divergence between US and EU bond yields. German bond yields out to 8 years are now in negative territory, while US bond yields rose overnight.

The broad USD gains were supported by good news out of US labour market indicators. The four-week moving average of initial jobless claims fell its lowest level in 15 years, suggesting that March’s woeful employment report might prove to be an aberration.

NZD/USD was again an outperformer, poking its head back above 0.7600 before beating a hasty retreat.

In yesterday’s BNZ Strategist, we noted that are actively looking to enter a medium-term short position above 0.76, looking for a drop to 0.72 or beyond. We failed to ask our London colleagues to watch an order (to sell) for us, so remain on the sidelines. We hope to get another opportunity ahead of next week’s dairy auction and the 20 April inflation report.

We understand that the carry-trade appeal of high-yielding currencies like NZD is once again being touted as a reason for their outperformance. While that may well be why some investors have decided to support NZD, we would not join them in any hurry.

The risk-adjusted return on a USD-funded carry trade into NZ has improved modestly in the past two weeks. But that has been almost entirely driven by falling volatility. We’d not bet on currency markets remaining becalmed for an extended period of time. There are still plenty of question-marks (and a significant divergence in views) around Greece’s ability to survive through Q2, and more importantly, the timing of Fed rate hikes.

Another night ahead of rather low-tier data. China’s inflation prints might be worth a read, and perhaps also Australian lending data.

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