Currency trends as the re-profiling of Greek debt prepares investors for a managed default

By Sam Coxhead*:

The past week proved to be a very interesting one for observers of the financial markets. The soft price action in the commodity markets, coupled with intense focus on the fragile European debt situation meant there was a bias towards risk aversion.

In the face of this was some improving economic numbers in the US, along with Germany and France, the powerhouses of Europe.

Building global inflationary pressures were also evident, and the higher interest rate projections that go with them. This made the US dollar appreciation, a relatively orderly affair.  The US dollar has continued to see a grinding resurgence driven by the lower commodity markets and bias towards risk aversion.

The EURO remains under pressure on all cross rates as the difficult process of 're-profiling' Greek debt is fleshed out. 'Re-profiling' is apparently an investor digestible term for the managed default of bond payments.

 Major Announcements last week:

- UK housing and manufacturing data weaker than expected
- Australian Trade Balance +1.75bil vs .49bil expected
- Australian Budget gives no surprises, expected return to surplus 2013
- RBNZ Financial Stability Report gives no surprises, states NZD undesirably high
- NZ Govt budget deficit 15% worse than expected as tax cuts do not flow to spending
- Chinese CPI as expected at 5.3%
- Chinese Authorities raise RRR 50bpts to curb lending/inflation growth
- BoE Inflation Report raises medium term inflation forecast, points to higher cash rate
- US Trade Balance -48.2bil vs 46.8bil expected
- Aust. Employment change -22.1k vs +17.6k expected
- US Retail Sales +.5% vs +.5% expected
- Eurozone GDP +.8% vs +.6% expected
- US CPI .2% vs +.2% expected
- US Consumer Sentiment 72.4 vs 70.0 expected 

NZD/USD 
The New Zealand dollar performed well against the USD last week given the overall risk aversion in the market at times.

Expect the risk aversion bias to remain in play, and the US dollar to maintain its pressure on the NZD.

Should the support at 0.7820 be broken, expect another leg lower from the NZD.

Along with the usual slurry of economic data due for release in the US, Wednesday’s Fed meeting minutes will be of particular note. On the New Zealand front, the pre-election budget will be closely watched.

NZD/AUD (AUD/NZD)
The New Zealand dollar remains under pressure from the AUD. Current levels provide good value buying of NZD with Australian dollars.

Apart from Thursday’s Govt Budget announcement, the lead will come from the demand for Australian dollars. 

Tuesday’s RBA meeting minutes will hold attention for indications on the timing of the next RBA cash rate hike. Expect this pair to remain in its recent .7300 - .7500 (1.333 - 1.3700) range.

Any increase in the odds on a June hike from the RBA, will see the NZDAUD move toward the lower end of the range (AUDNZD will move higher).

NZD/GBP (GBP/NZD)
The NZD remains at high levels against the GBP, and represents good value buying of GBP for money transfers from NZD to GBP.

Three main pieces of news are due for release in the UK this week. Firstly monthly inflation numbers are due Tuesday. A higher than expected number could see further pressure on the BoE to hike the cash rate earlier than expected.

On Wednesday the BoE meeting minutes released are released and these will be closely watched, although no change in the voter split towards a hike is expected. Thursday sees the monthly retail sales figures released with an expectation of a +1.0% number.

In New Zealand the prime focus will be the Budget on Thursday, although not much in the way of market moving decisions are expected from this.

 
NZD/CAD
This pair remained in its recent range last week. With little in the way of domestic stimulation in either country, the lead was provided by the market’s overall appetite for risk.

Expect this range to continue to contain the pair in the coming week. Thursday’s NZ Budget release will be watched by the market, ahead Friday’s release of Canadian CPI and retail sales numbers.

If the overall USD bid tone remains in the market, expect the NZD to be pushed down towards the lower end of the range.

NZD/RAND
The NZD outperformed the RAND throughout last week. Various levels of resistance were swept aside as the RAND was pushed lower by the resurgent USD.

Lower commodity prices and the South African Reserve Bank (SARB) comments that inflationary pressures were transitory enabled swift outflows from the RAND.

The SARB also slightly reduced their growth forecasts for the current year and this further helped the RAND in its move lower.

If current market sentiment continues, and commodities resume their move lower, further weakness from the RAND cannot be ruled out. Current levels represent good levels at which to start staggered transfers from NZD into RAND.

NZD/EURO (EURO/NZD)
The EURO was under pressure last week as the Greek debt situation remained of huge concern to the markets. These concerns justifiably outweighed better than expected growth data from Germany and France.

The two tiered nature of the European economy is clear to see and remains a real challenge for the European Central Bank (ECB) to deal with.

Early this week sees important meetings between senior European officials and at the top of the agenda will be the Greek crisis and the rubber stamping of the Portuguese bailout package. It’s hard to see the EURO bouncing this week, but given how quickly it has fallen, a bounce at some stage cannot be discounted.

Current levels represent excellent buying of EURO with New Zealand dollars.

A higher than expected European inflation number due on Monday, would increase the pressure on the ECB to hike the cash rate sooner rather than later. Any cash rate increase is going to place further pressure on the peripheral member states and there fragile economies. The NZ Budget announcement on Thursday will be watched by the market, but is unlikely to have a large impact.

 
NZD/YEN (NZD/YEN)
This pair remained in its expected range over the last week, which was a good result for the NZD given the reasonable levels of risk aversion in the markets.

This week sees Japanese GDP numbers due for release on Thursday, ahead of the NZ Budget release.

Friday sees the Bank of Japan release its Monetary Policy Statement and this will be watched closely. In the absence of another sharp decline in commodity prices, expect the current range trade to remain in place for the time being.

AUD/USD
The Australian dollar gave up ground to the resurgent US dollar last week. General market risk aversion and the soft nature of commodity prices are the lead causes.

The AUD’s decline has been slowed by the ongoing expectations of a cash rate hike from the Reserve Bank of Australia over the coming months. Given the intensity of the European debt crisis, expect the USD resurgence to remain intact with the general market risk aversion.

The focus for the week will start on Tuesday with the Reserve Bank of Australia’s Meeting minutes, with any inkling towards the timing of a cash rate hike, being looked for by the market.

Wednesday sees the US Federal Reserve’s Meeting minutes released and these will be watched for any insight to the removal of stimulus measures. Thursday sees housing and manufacturing numbers due in the US.

AUD/GBP (GBP/AUD)                            
The Australian dollar hit decade highs against the GBP last week, and at current levels remains great value buying of GBP with AUD.

The prospect of a cash rate hike in Australia has insulated the AUD from the resurgent USD. This week’s data gives the GBP the chance to make up some ground. UK inflation numbers on Tuesday will be keenly watched and a higher than expected number will see the GBP gain support.

The previous Bank of England meeting minutes are being released on Wednesday, and will be closely watched. UK retail sales numbers are due on Thursday. The Reserve Bank of Australia Meeting minutes are due Tuesday and will also be watched closely.

 
AUD/EURO (EURO/AUD)
The EURO remained under pressure from the AUD last week, although it lacking the dramatic drop of the week previous.

The EURO will remain under pressure this week as the conflict between a potential hike in the cash rate from the European Central Bank is countered by the ongoing debt issues in the peripheral member states.

Along with the two day meeting of European Finance Ministers on Monday and Tuesday, the European inflation numbers on Monday will be closely watched.

In Australia the Reserve Bank of Australia Meeting minutes on Tuesday will garner attention, as will the wage price data on Wednesday.

GBP/USD
The US dollar outperformed the Pound Sterling last week in the face of an increase in the medium term inflation outlook from the Bank of England.

The US dollar has been threatening to fight back from its lows levels, and should the global risk appetite continue to wane, there is potential for further downside for the GBP.

The UK has plenty to hold attention this week. The focus starts on Tuesday with the monthly inflation numbers. Wednesday sees the minutes from the previous Bank of England meeting released and these will be closely watched upon release. Thursday is the turn of the US with the minutes from the recent Fed meeting due for release. Friday sees the UK retail sales figures released with an expectation of a 1.0% increase, followed by US housing numbers and manufacturing index.

GBP/EURO (EURO/GBP)
The EURO gave up ground last week as the focus on the Greek debt crisis intensified.

Progress from current levels will be harder fought for the Pound Sterling as the prospect of a rate hike from the European Central Bank in the near future still looms.

Both economies have the all important inflation numbers due out this week. Monday sees the European number released with an expectation of 1.5% , while the UK number is expected to be 4.1% and due on Tuesday. Wednesday sees the Bank of England  cash rate meeting minutes released and these will be closely watched as usual. The meeting of European Finance ministers is being held on Monday and Tuesday and the comments hitting the wires from these meetings will no doubt have an impact.

Top of the agenda will be the ongoing Greek saga, and the rubber stamping of the Portuguese bailout. Expect price action to remain volatile.

GBP/RAND
The Pound Sterling outperformed the RAND last week as risk aversion took hold on the market. Higher than expected inflation projections from the South African Reserve Bank were not enough to stem the flow from the RAND.

With commodity markets remaining soft, expect the GBP to maintain its  pressure this week. UK inflation numbers on Tuesday, Bank of England Meeting minutes on Wednesday and UK retail sales on Friday could provide some volatility.

Market commentary:

The past week proved to be a very interesting one for observers of the financial markets. The soft price action in the commodity markets, coupled with intense focus on the fragile European debt situation meant there was a bias towards risk aversion.

In the face of this was some improving economic numbers in the US, along with Germany and France, the powerhouses of Europe. Building global inflationary pressures were also evident, and the higher interest rate projections that go with them. This made the US dollar appreciation, a relatively orderly affair.  The US dollar has continued to see a grinding resurgence driven by the lower commodity markets and bias towards risk aversion.

The EURO remains under pressure on all cross rates as the difficult process of 're-profiling' Greek debt is fleshed out. 'Re-profiling' is apparently an investor digestible term for the managed default of bond payments.
 
The New Zealand dollar performed relatively well on most cross rates, with its lead being taken from the Australian dollar in the absence of tier one economic data. The Reserve Bank of New Zealand (RBNZ) Financial Stability report held few surprises. Even International Monetary Fund statement that the NZD was 20% overvalued, and comments from RBNZ Governor Bollard about the undesirably level of NZD, had little overall effect on the price action over the week.

The NZ Govt deficit was 15% worse than expected, as tax cuts did not flow through to spending. With little on the economic data calendar in NZ this week, the focus will be on the pre-election Govt Budget due for release on Thursday. With a commanding lead in the polls, expect appropriate fiscal restraint from National’s Minister of Finance Bill English.
 
The Australian dollar preformed relatively well given the market conditions. It gave up ground to the US dollar as expected given the weakness in the commodity markets and its high level from a historical perspective. Given the weaker commodity markets, unexpected negative jobs growth, and another rise by Chinese authorities of their banks Required Reserve Ratio, the AUD could easily have moved lower against most trading partners. The prospect of a higher cash rate in the coming months is supporting the AUD. Tuesdays Reserve Bank of Australia Monetary Policy Meeting minutes will be closely watched by the market for any indications to the actual timing of the coming interest rate hike.
 
The EURO will probably remain under pressure in the coming week as the focus on the complex debt situation remains intense. Adding to the mix is the two tiered nature of the Eurozone’s economy. Better than expected GDP numbers in Germany and France are in stark contrast to those of the fragile peripheral member states. As austerity measure’s start to bite in the economies of countries trying to reduce their debt burdens, the accompanying drop in tax revenues may well prove to be the tipping point. Results of a Bloomberg survey last week showed 85% of respondents expected a Greek bond default. Yields on Greek debt are now twice that of when they received their initial bailout package last year.  Forecasts of medium term European inflation were increased last week, further adding to pressure on the European Central Bank for a hike in the cash rate. Monthly inflation numbers due on Monday will reveal the latest information on this.
 
The economic outlook in the UK remains sluggish at best. Housing and manufacturing data remains moribund at best and last week’s Bank of England (BoE)Inflation Report increased the forecasts for medium term inflation. This places further pressure on the BoE to tame inflationary pressure through a cash rate hike at some stage. This week’s economic calendar is busy for the UK. Monthly inflation numbers are due on Tuesday. Wednesday sees the release of the much anticipated BoE Monetary Policy Committee Meeting (MPC) minutes, ahead of retails sales figures on Thursday. The GBP gained against the EURO last week and remains at historically low levels against both the NZD and AUD. Any clear indications of a move in bias towards higher rates from the BoE MPC minutes, should see the GBP outperform as the interest rate differentials will close.
 
Economic data in the US remains patchy with retails sales numbers just making expectation, consumer sentiment lifting, but the trade balance wider than expected last week. Longer term interest rates in the US remained relatively low last week with the risk aversion at play. Employment remains a key issue for the Federal Reserve (Fed), as they contemplate the removal of the stimulus of the last few years. With inflation remaining relatively subdued at this stage, the conjecture will be based around the reduction of the Fed’s holdings of Treasury bonds for the most part. This week’s focus will mainly be on the Federal Open Market Committee meeting minutes due for release on Wednesday. Also remaining in the picture is President Obama’s push for the Budget approval to raise the US Government’s debt ceiling.
 
The Canadian dollar remained relatively range bound over the last week. There was little in the way of market moving data , and with the oil price stablising  around the USD $100 level, there was little stimulus to push the CAD either way. The focus this week will be Friday’s release of the monthly inflation and retail sales data.
 
The YEN remained relatively strong against most trading partners last week as the risk aversion bias played its part. Should the USD/YEN drop below 80.00, the prospect of further Bank of Japan (BoJ) intervention to curb YEN strength remains real.  Taking this into account, along with the possibility of disaster re-insurance flows into YEN, and there is potential for a period of range bound price action around current levels. Monthly GDP figures on Thursday will be watched for the size of the post disaster economic contraction and the BoJ Monetary Policy Statement on Friday will also garner attention.

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Sam Coxhead is a currency analyst with DirectFX You can contact him here >>