It's a 'Greek week' with the risk of a Lehman event

By Sam Coxhead*:

The prospect of a Lehman type credit event in the advent of a Greek debt default remains the primary concern.

Various meetings of high ranking European finance officials remain on going, and this will ensure the 'noise' surrounding this issue in the market remains high.

The apparent IMF commitment to pay the next payment of the next tranche the current Greek bailout program should quell fears in the short term, but this remains a significant and ongoing issue.

The complexities remain high with civil and political unrest in nations both requiring bailout funds, and those contributing them. 

Major Announcements last week:

· Chinese Inflation 5.5% as expected
· Chinese Industrial Production 13.3% vs 13.1% expected
· UK Inflation 4.5% as expected
· US Retail Sales (core) +.3% as expected
· NZ Retails Sales +.7% as expected
· UK Unemployment Claims 19.6k vs 7.1k expected
· US Inflation +.3% vs +.2% expected
· UK retail Sales -1.4% vs -.5% expected
· European Inflation +2.7% as expected
· US Building Permits and Housing Starts higher than expected
· US Weekly Jobless Claims 414k vs 421k expected
· US Philadelphia Fed manufacturing Index -7.7 vs +7.1 expected
· BoJ Monetary Policy Meeting minutes reveal further accommodation maybe needed at some stage
· US UoM Consumer Sentiment Survey 71.8 vs 74.2 expected

NZD/USD 
The NZD gave up a little ground against the US dollar last week, although it rebounded well from the low of .7973. Prospects for this week will be driven by offshore moves with just the New Zealand current account to watch for on Wednesday.

If the current trend lower in commodities continues, expect the NZD to move grindingly lower against the USD. The US Federal Reserve decision and statement on the cash rate and monetary policy will be closely watched on Wednesday.

Moves to the topside should be contained at .8200 initially, with the appetite for risk unlikely to see a major breakout of last week’s range. Conversely downward moves will be supported by participants looking to transfer funds from US dollar into NZD, given the higher yield.

NZD/AUD (AUD/NZD)
The NZD gave up ground to the AUD last week, in a move that was sparked by the large aftershocks in Christchurch on Monday. Subsequent trade saw this pair wash around in the absence of any domestic data of significance in NZ or Australia.

This week is looking similar with just RBA Monetary Policy Meeting minutes due on Tuesday, and New Zealand Current Account data due on Wednesday.

In the absence of any material coming from the RBA, expect the pair to stay within the expected range.

NZD/GBP (GBP/NZD)
The NZD saw mostly sideways trade against the pound sterling last week, after the initial move lower following the aftershocks in Christchurch. The economy remains very soft in the UK and the focus for this week will no doubt be the BoE Monetary Policy Committee meeting minutes due for release on Wednesday.

With slow growth and high inflationary pressure, the BoE is in an unenviable position. The tone of the minutes will be key. The unlikely event of a hint of a move towards a hike in the cash rate, would be GBP supportive. More likely is that any NZD weakness would be driven by general market risk aversion.

 
NZD/CAD
The NZD lost ground to the Canadian dollar last week. This weakness was mainly driven by market appetite for risk, as there was no real meaningful economic data in Canada.

This week sees the focus on retail sales due for release on Tuesday in Canada. A breakdown through the .7850 support level would open the way for another leg lower, back towards more historically average levels for this pair.

Current level continue to represent good value buying of CAD with NZD, for money transfers.

NZD/RAND
This pair had a relatively small range last week, after the initial NZD weakness caused by the large aftershocks in Christchurch on Monday. Both economies saw better than expected retail sales numbers released, but these did little to effect the exchange rate.

This week has all the focus on South Africa, with employment numbers due on Tuesday and inflation numbers due Wednesday.

Any increase in the likelihood that the South African Reserve Bank will hike the cash rate earlier than expected will obviously see the rand outperform.

NZD/EURO (EURO/NZD)
The NZD and euro traded a fairly tight range after the initial NZD weakness on the back of the aftershocks in Christchurch on Monday. The NZD matching the weaker EURO for the most part, during the periods of risk aversion. Monday's announcement that Euro-zone members have delayed the decision on extended bailout funds for Greece until early July, should keep the pair in a holding pattern.

If market risk aversion increases, the NZD may well underperform, but at current levels the EUR remains good value buying with NZD.  With the process of dealing with the debt situation continuing to stretch out, expect reasonable intra-day volatility to continue.

 
NZD/YEN (NZD/YEN)
The Yen outperformed the NZD over the course of last week, as risk aversion once again came into the market. There is an absence of economic data in either economy this week, so expect the lead to continue to come from the general market appetite for risk.

If the resistance at 65.25 holds, expect this pair to test lower towards the significant support at 63.75. If this trend continues in favour of the Yen, we will approach levels that represent good value buying of NZD with Yen but we are not quite at those levels yet.

AUD/USD
This pair continued to trade in its recent range over the last week. Given the increasing nature of the risk aversion and somewhat softer commodity markets, the bias has to be skewed towards testing support levels at some stage. Holding up the descent has been central bank buying, and the latest to state their intent for AUD has been the Russian central bank.

This type of buying has provided good support over the last year or so, but with a weakening short term outlook for commodity markets, there is increased chances that these entities will try and buy the AUD at lower levels. Of focus this week in Australia is the RBA meeting minutes due for release on Tuesday.

In the US, the Federal Reserve statement on the Fed Funds rate (cash rate) on Wednesday will be closely watched. Later in the week sees the release new home sales and durable goods sales data on Friday. If the crucial support level at 1.0440 gives way, expect a test back to the 1.0200 region.

AUD/GBP (GBP/AUD)                            
The AUD outperformed over the course of the last week, as the weak UK data weighed on the pound sterling. While the AUD was stronger, we remain in a familiar range, and at levels which undoubtedly provide good value buying of GBP with Australian dollars.

The focus this week will be on the monetary policy meeting minutes from both respective central banks. The RBA minutes are due on Tuesday, the BoE minutes on Wednesday. The other guiding influence will be the performance of the commodity markets. Should we see the softness continue, the AUD may well underperform.

In the absence of any real change in tone from the BoE, AUD weakness is likely to be the only way we will see the GBP outperform.

 
AUD/EURO (EURO/AUD)
The AUD outperformed the euro for the most part last week as the fears about European debt issues increased. Enabling the euro to bounce off the lows was the weakening outlook in the commodity markets, that weighed on the AUD. The debt issue will remain in the headlines for some time yet, as Euro-zone financial leaders delay any kind of decision about the extension of the Greek bailout package until early July.

While this holding pattern persists, the focus will be on the state of Greek politics and the ability of the Greek Government to push through the require austerity measures.

On the Australian side of the equation, expect the RBA Monetary Policy meeting minutes to be closely watched. If the commodity markets continue to soften, expect the AUD to follow suit.

GBP/USD
This pair saw reasonable volatility over the last week. The GBP saw strong demand running into the release of that the UK inflation number. It came out as expected at 4.5%. The speculative market was looking for a higher number as the GBP softened after its release and maintained it down trend throughout the week, as a softer commodities environment gave the USD a boost. Not helping matters for the GBP were weak housing and retail sales numbers.

The focus for this week will be on the respective central banks on Wednesday. The BoE meeting minutes start off and are followed by the Federal Reserve on Monetary Policy announcement, and accompanying statement.

GBP/EURO (EURO/GBP)
This pair ended up broadly unchanged over the last week. The pressure on the euro was unsurprising due to the Greek debt issue, which has seemingly been given a short term solution by the IMF commitments for the next tranche of funds due on the 29th June. These issues are not going away in the short term and will temper any major demand for EUR in the meantime.

Apart from the flora of 'noise' on the news wires with regards to the debt issue, the focus will be on the BoE Monetary Policy meeting minutes due for release on Wednesday. Any change of tone towards the need for an earlier than expected hike in the cash rate will be GBP positive. Expect the recent range to contain this pair in the absence of action provided by the BoE minutes.

GBP/RAND
This pair traded a relatively small range last week. The positive South African data meant the GBP gave up a small amount of ground, in the face of weaker commodity markets.

The focus for this week starts on Tuesday with quarterly South African employment numbers. Wednesday sees the BoE Monetary Policy Meeting minutes released, and the latest South African inflation numbers.

A break of support at 10.90 opens up the way for a leg lower towards support at 10.8000.

Market commentary:

The global financial markets remained nervous throughout last week. Periods of risk aversion have been common. The equity and commodity markets have seen continued weakness, with growth assets leading the way.

Of note is the move lower in oil, which is economically healthy if it can be sustained, and should help stablise the US dollar.

The concerns over the European debt situation remain high. The prospect of a Greek default remains a primary concern, although a IMF commitment of funds in the short term has allayed these fears for the time being.

Also slightly easing fears has been Germany backing down on its call for private investors to accept a reduced amount of principle to be repaid.

Economic growth data has continued its trend of softness for the western world. This was evidenced by the IMF revision of the US growth forecast down from 2.8 for 2011,to 2.5%.

The Australian dollar had a mixed performance last week, in the absence of top tier economic data. Interestingly, the chances of a cash rate hike in the coming months have been all but discounted now, and this in the face of Reserve Bank of Australia (RBA) Governor Stevens comments stating that it was a matter of time before we see a lift in the cash rate.  Easing European debt fears saw the AUD finish the week broadly unchanged and this week we have only RBA Monetary Policy Meeting minutes as a focus, on Tuesday. Expect the AUD to see movement in line with general market risk appetite(i.e. if risk appetite is strong, AUD will appreciate, if appetite is weak, AUD will languish or weaken).

The New Zealand dollar recovered from the weakness it saw after last Mondays large aftershocks in Christchurch, to trade in line with general market appetite for risk. The retail sales number was a bright spot for the week, albeit it a positive number coming from a very low base. The likelihood of a December rise in the cash rate reduced a little after Monday’s shakes, with a current 40% chance of a December hike, according to the current interest rate market levels. New Zealand current account data due on Wednesday will be watched, but expect little effect. In the absence of any other domestic data, expect this week’s price action to be driven by offshore  markets.

The economic data in the US remains mixed at best. The reduced IMF growth forecast to 2.5% for 2011 is not surprising given the soft nature of the indicators of late. The lower oil price should see the US dollar stablise if it can be sustained. The Congressional debt cap negotiations will remain closely watched, and an early agreement would be US dollar positive. Whilst the manufacturing numbers last week were not positive, the pickup in the housing numbers are a positive sign. The Federal Reserve Open Market Committee  statement and accompanying press conference on Wednesday will be closely watched, as market conjecture on any further easing policies remains prevalent. Europe debt situation remains the focus of global markets and will likely remain so for some time.

The prospect of a Lehman type credit event in the advent of a Greek debt default remains the primary concern. Various meetings of high ranking European finance officials remain on going, and this will ensure the 'noise' surrounding this issue in the market remains high. The apparent IMF commitment to pay the next payment of the next tranche the current Greek bailout program should quell fears in the short term, but this remains a significant and ongoing issue. The complexities remain high with civil and political unrest in nations both requiring bailout funds, and those contributing them. There is potential for the euro to appreciate as the current Greek funding problem is passed.

Credit rating agencies remain focused on the wider debt issues, with various Irish, Portuguese, Italian and Greek entities given downgrades or placed on negative watch last week. In the UK economic data remains soft, with the housing and retail sales sectors indicating households remain under pressure. Inflationary pressures remain with the 4.5% number coming in right on expectations.

With conflicting comments coming from the Bank of England (BoE) Monetary Policy Committee members, the latest BoE meeting minutes on Wednesday will be closely watched. In the meantime the pound sterling remains in its wider ranges against almost all currency pairs.

In Canada the lack of domestic data saw the CAD being led by offshore moves. This will continue this week for the most part, with just retail sales to focus on with an expectation of .5% for the month. 

In Japan the economy remains under pressure as the slow stablising of the economy gets underway after the earthquake and tsunami. The Bank of Japan has maintained its easy monetary policy and indicated than it will increase its loan scheme to growth industries. This policy gave wind to some equity gains on the Nikkei in the face of generally weaker markets.

In South Africa last week a surprising jump in retail sales caught the market by surprise. The 9.8% increase against an expectation of 5.0% shows the consumer is relatively upbeat and will bring the South African Reserve Bank into play if the trend continues. This week sees employment numbers on Tuesday and inflation numbers on Wednesday. Better than expected numbers will add to the focus for a hike in the cash rate. 

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