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FX Update - Buckle up!

Written by Ian Dobbs on June 30th, 2015.      0 comments

Market Overview:
The second half of 2015 looks like it could be a wild ride. Volatility in financial markets is picking up dramatically and we haven’t even made it to the Fed’s first interest rate hike yet. The major focus in the past few days has been on Greece, but you can’t ignore what’s going on in China at the moment either. Chinese stocks fell more than 7% (wiping $668 billion off market value) on Friday alone, which prompted dramatic cuts from the Chinese central bank over the weekend. The People’s Bank of China (PBOC) cut its benchmark interest rate, but also eased reserve requirements. The last time they took both measures at once was in 2008. The Greek situation is a mess. PM Tsipras walked away from negotiations on Friday and, without informing anyone first, called for a referendum. Greece has now introduced capital controls and Greek banks will be closed for up to six days as ATM machines ran dry across the country over the weekend. Greece will almost certainly default on its EUR 1.6bn payment due today to the IMF, and their current bailout programme also expires today. The Euro was initially hit hard, European stock look shaky and risk aversion is sweeping the markets. It looks like the fun has only just begun.

There has been no economic data of significance released from Australia over the past week. The Australian dollar has been influenced by events in China, as Chinese stocks enter bear market territory (down over 20% from their peak). This prompted a reaction from the People’s Bank of China who eased aggressively in order to limit the damage. The Chinese stock market has been in a bubble of epic proportions, driven largely by uneducated and unsophisticated investors. It’s a recipe for disaster and although the central bank action may temporarily halt the declines, there is plenty of room for further losses. Even after the recent 20% decline, Chinese stock are still up around 100% on the year. Further volatility is expected over the coming months. We do have some Australian releases to draw focus over the coming days. RBA Governor Stevens is due to speak tonight, then later in the week we get building approvals, the trade balance and retails sales data.

New Zealand
The past week has been a quiet one for economic data from New Zealand with Friday’s trade balance the only release of note. That did come in much better than forecast with a surplus of 350m. That’s the fifth surplus in a row. Imports were significantly lower than expected and that may not be such a great thing. There was a sharp fall in imports of capital equipment which is a sign of weak business investment. That’s could well weight on growth prospects going forward. Earlier this morning we saw the latest building consents data. Consents came in at flat against the previous fall of 1.7%. Later this afternoon we get business confidence numbers and then tomorrow night we have another dairy auction to digest. Offshore developments will continue to draw the most attention this week however, with massive uncertainty around Greece, and the health of the Chinese stock market.

United States
Data from the United States over the past week has been a little mixed, although generally supportive of the economic recovery going forward. Housing market indicators suggest there is plenty of momentum in that sector and Friday saw strong positive revisions to consumer sentiment. Weekly jobless claims remain at levels consistent with solid employment growth and that should be confirmed on Thursday night with the release of non-farm payrolls data. The market is expecting a reading of +270k which should serve to reinforce expectations for a September interest rate hike from the Fed. Other data to watch for this week includes Chicago PMI, manufacturing PMI and factory orders.

United Kingdom
The past week has only seen a handful of second tier releases from the UK, all of which have come in below expectation. The underlying trend in most of these indicators is still very positive however. While the most recent mortgage approvals figures were softer than forecast, approvals have risen in four of the past six months and other housing market indicators suggest a pick-up in recent months. Net lending to individuals also disappointed printing at 3.1bn versus 3.3bn expected. But on a three month annualised basis, consumer credit rose at the fastest pace in almost ten years. UK households continue to spend and this will underpin the economic recovery going forward. Overall the data has had little impact, with events in the wider market drawing focus in recent days. Later in the week we have the trifecta of PMI’s from the manufacturing, construction and service sectors to digest.

Greek PM Tsipras surprised almost everyone, including his own team of negotiators in Brussels, when he announced on Friday evening a snap referendum set for 5th July. No one really knows the exact wording of the question he will put to the Greek people, but it’s basically going to ask if Greece is willing to submit to creditors demands to release more bailout cash, or not. The problem is the current bailout programme actually expires at the end of today, and no one has said they’re willing to offer him an extension just so he can go ask voters to reject the entire thing. The time for a referendum would have been a few weeks ago. Funds have been fleeing the Greek banking system for weeks, but those outflows accelerated over the weekend. As a result Greece has been forced to introduce capital controls, part of which are that Greek banks remain shut until next week. In short the situation is a mess and a disorderly Greek default and Euro exit are starting to look like very real possibilities. Almost certainly, Greece will default on its payment of EUR 1.6bn due today to the IMF. The country may also be forced to make pension and salary payments with IOU’s. Europe has had plenty of time to prepare for this eventuality, but no one really knows just what contagion there may be. The financial markets do not like the uncertainty and risk aversion has been prevalent in trading since first thing Monday morning. As you would expect the initial reaction was for the EUR to lose significant ground, but somewhat surprisingly it turned around and squeezed higher last night. The risks remain skewed to the downside over the coming weeks if Greece does crash out of the currency union. Economic data from Europe will take a back this week as markets remain focused on how the Greek debacle unfolds.

Events in the wider market have been the major focus over the past few days and as such Japanese data has largely been side-lined. As is usually the case in times of increased volatility and uncertainty, the Yen will see appreciation as risk aversion dominates trading. That was certainly the case early Monday morning as the Yen gained ground across the board on the back of Greek fears. A huge amount of uncertainty remains around the potential for a Greek exit and as such the Yen is likely to see further periods of risk aversion (appreciation) over the coming week. In terms of actual data from Japan at the end of last week we saw inflation remain very subdued. Household spending was however, more encouraging jumping 4.8% year on year. That was backed up by retail sales figures yesterday which increased 3.0% versus 2.1% expected. Also released yesterday was the latest reading on industrial production and this didn’t make such great reading, coming in much weaker than forecast at -2.2%. This data has raised fears of a poor second quarter GDP figure and it certainly makes the Bank of Japan’s (BOJ) economic forecasts on growth and inflation a lot harder to reach. Still to come this week have average cash earnings data along with the quarterly Tankan report.

There has been no economic data of significance released from Canada over the past week. We did see the raw materials price index come in bang on expectation last night at +4.4%, but there was no market impact with attention squarely on the Greek situation at the moment. Tonight we get monthly GDP data and the market is looking for a reading of +0.1%. There is little else scheduled for release with a Canadian bank holiday on Thursday.

Major Announcements last week:
  • US Durable Goods Sales +.5% vs +.6% expected
  • US New Home Sales .546m vs .525m expected
  • China’s PBOC lower in rates and cut RRR requirements
  • US Q1 GDP -.1% as expected
  • NZ Trade Balance 350M vs -100m expected
  • Japanese Retail Trade 3.0% vs 2.3% expected