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A dearth of market-moving data shifts focus back to Greece - and the RBA's rate and tone choices

Currencies
A dearth of market-moving data shifts focus back to Greece - and the RBA's rate and tone choices

By Raiko Shareef

Markets were largely in a holding pattern overnight, amid a relative dearth of market-moving data, and ahead of more important events later in the week.

Major currencies have generally kept tight ranges.

Performances against the USD were mixed, but the latter is up at an index level, thanks to a softer EUR.

EUR/USD’s 0.5% decline is, rather sadly, the most striking feature of the G10 FX landscape, and is more attributable to thin liquidity conditions than a genuine reaction to data. In fact, German and euro-zone April PMIs were revised higher in their final reading.

While it cannot be directly attributed to EUR’s decline, news and commentary around Greece’s debt negotiations does not seem promising.

The country and its creditors could not claim any breakthroughs after the weekend’s intense negotiations.

This morning, the FT reported that the IMF may withhold its share of bailout aid to Greece, if the country’s debt is not put back on a sustainable path. With the primary surplus undershooting targets, the return to ‘sustainable’ would entail some debt write-downs, an outcome that Europe will find hard to swallow.

Separately, we note the commentary discussing the possibility of a Greek exit from the euro-zone has become more mainstream, and less alarmist. Gideon Rachman, the FT’s chief foreign affairs columnist, published a piece musing that a ‘Grexit’ may well be the best outcome to the current stalemate. We believe there is some disconnect between the increasing comfort with which commentators talk about a Grexit, and how well prepared the market is for such an event. Investors are operating under the assumption that a ‘muddle-through’ solution will be found, which is keeping EUR/USD from trading much closer to parity.

NZD/USD hardly reacted to a sharper-than-expected fall in the ANZ commodity price index yesterday.

To be sure, a drop was widely anticipated, given the poor dairy price action of late. The market has had its fill of negative commodity news of late, included Fonterra’s downgraded payout from $4.70kg/MS to $4.50 last week.

We see NZD being relatively well-supported over the near-term, in the absence of a broad-based USD rally.

Today’s RBA rate decision will help provide some immediate direction.

Should the RBA hold its policy rate steady (as our NAB colleagues expect, but a minority view), and the Board signal a period of interest rate stability (unlikely), the reaction could be very sharp. NZD/AUD would almost certainly break below 0.95.

At the other extreme, a rate cut and a promise of more to come would likely see a quick test of resistance at 0.9730.


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