Opinion: Markets confused by European dithering on Greece

by Mike Jones NZD/USD see-sawed wildly inside a 0.7030-0.7080 range for most of last night. The net result has seen NZD/USD end up bang on where it was this time yesterday, around 0.7060. Swings in risk appetite and EUR/USD kept most currencies volatile as markets try to figure out what, if any, support will be offered to Greece from this week’s EU Summit. The message from European policy makers has been far from clear. Last night, EU President Van Rompuy said he wants agreement on a rescue package for Greece before the Summit begins. But German officials remain adamant no decisions will be made on Greece and continue to direct Greece towards the IMF for help. As a result, EUR/USD skidded to 1.3480, dragging NZD/USD to nearly 0.7030. But the dip in NZD/USD proved to be short lived. US home sales data for February exceeded expectations, assuaging some of investors’ concerns about the global outlook. The associated paring of ‘safe-haven’ positions in JPY and USD helped underpin a recovery in NZD/USD. In addition, a relatively hawkish article from RBA watcher Terry McCrann saw NZD/USD piggyback off gains in AUD/USD. The global backdrop is a bit of a mixed bag at the moment and is not providing a lot in the way of direction for currency markets. However, with this week’s NZ data expected to confirm a relatively solid NZ economic picture, we suspect NZD/USD will find solid support on dips towards 0.7000. Today’s Q4 balance of payments figures look set to be the curtain raiser to tomorrow’s GDP main event. Current account figures are expected to confirm a rapidly shrinking deficit, down to around 2.0% as a proportion of GDP for calendar 2009 (previously -3.1%). In the absence of a major surprise on this front, we suspect NZD/USD will remain contained by a 0.7020-0.7080 range in the short-term. Majors The USD strengthened against most of the major currencies overnight. Through the early part of the night, weakness in EUR and GBP dragged the USD higher. European leaders still appear to be at loggerheads over what to do about Greece. EU President Van Rompuy said he is seeking agreement on a Greek aid package before this week’s EU Summit begins. At the same time, various German officials continue to stress no decisions will be made on Greece at the Summit. In fact, Chancellor Merkel said Germany would only agree financial aid for Greece as a last resort and when combined with support from the IMF. Ratings agency Fitch even chipped in, saying it doubts EU leaders will offer aid for Greece. Worries about Greece kept EUR heavy for most of the night. EUR/USD again tested support towards 1.3470, before bouncing off these lows. Meanwhile, EUR/CHF slumped to a record low of nearly 1.4280. Markets completely ignored more intervention rhetoric from the Swiss National Bank. President Hildebrand reiterated the SNB will “act decisively against excessive franc gains". GBP ran into a stumbling block in the form of weaker-than-expected February inflation data. Annual CPI inflation fell to 3% (3.1% expected), from January’s 14-month high of 3.5%, reinforcing the notion the Bank of England will not need to tighten policy anytime soon. The knee-jerk reaction to the data saw GBP sink to around 1.4980. Later in the night, signs of a stabilisation in the US housing market helped ease fears about the global outlook, causing investors to pare ‘safe-haven’ positions in the USD. February existing home sales dipped only 0.6% compared to the 1.1% fall expected, while house prices slipped 0.6% (-0.8% expected). The Richmond Fed Manufacturing Index also positively surprised (+6 vs. +5 expected). The S&P500 and the Dow Jones reversed earlier losses in the wake of the data (currently up 0.3% and 0.6% respectively), helping risk appetite recover and shoring up sentiment towards GBP and EUR. For further clues on the strength of the global recovery, keep an eye out for tonight’s European manufacturing PMIs. US durables goods orders and new home sales will also garner attention. Nevertheless, the EU Summit (March 25 & 26) remains the key event this week, with market participants watching to see whether concerns about Greece’s funding difficulties will be addressed by European leaders. Ahead of the Summit, bounces in EUR/USD are expected to limited to around the 1.3600/30 region. Initial EUR/USD support is eyed towards 1.3430. *All of the research produced by the BNZ Capital team of economists is available here