Falling oil prices have bigger influence on some currencies than the euro-zone tensions. China and Iran main drivers

By Raiko Shareef

Major currencies have generally recovered much of the losses associated with Greece’s ‘No’ vote yesterday.

EUR remains 0.6% in the red, having been as much as 1.2% lower early in the Asian session.

The biggest currency movers, NOK and CAD, have been more influenced by plunging oil prices. Equity markets continue to bleed lower.

As we discussed yesterday, it now seems clear that the ECB does not to want to make a decisive call on Greece’s solvency by itself. It continues to extend credit to Greek banks (though at tougher terms), while it waits for a summit of European leaders on Tuesday. There, German Chancellor Merkel and her peers will review the Greek government’s proposal for a new deal.

There are already signs of friction between Germany and other creditor countries about the path forward. France, Italy, and Spain appear more amenable to allow Greece a better deal, as a result of the referendum. However, without Germany’s buy-in (at this stage, an unlikely prospect), such a proposal will not get off the ground. Little wonder that many analysts have now cite a Greek exit from the euro-zone as their base case scenario.

At the very least, Greece’s position at the negotiating table will be improved by the resignation of Greek Fin Min Varoufakis. His relationship with European counterparts has been strained, to say the least. There is some hope

Currency markets have taken all this in their stride, with EUR’s steadiness rather remarkable. This plays to the grain of the seemingly popular view that a Greek exit would not guarantee chaos in markets. We do not share this view, and are braced for further EUR weakness.

Oil prices dropped sharply yesterday, thanks to perfect storm of demand and supply-side fears. Investors are rightly concerned about the strength of European and Chinese demand going forward, given recent ructions in both regions. In addition, there is some optimism that a nuclear agreement with Iran may be struck soon, which would allow that country to sell more crude oil. The WTI oil price is 7.3% lower at $52.8.

NZD/USD recovered back about 0.67 over the course of the day, performing relatively well compared to other risk-correlated currencies. The AUD remains under pressure, largely thanks to a 5.4% slide in iron ore prices. The NZD/AUD cross has so far been capped by resistance at 0.8970.

Today, the local Quarterly Survey of Business Opinion has the potential to drive NZD direction, especially if it reinforces the recent run of negative data. Across the ditch, the RBA is not expected to deliver any surprises.

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Raiko Shareef is on the BNZ Research team. All its research is available here.