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FX Update - “Greece has been devastated and humiliated”

Written by Ian Dobbs on July 14th, 2015.      0 comments

Market Overview:
The announcement in the past 24 hours that a deal has been reached between Greece and its creditors will be a relief to many market participants. It certainly won’t be of much comfort to Greece however, as it falls well short of securing Greece’s long term financial future. In fact it’s hard to see how the outcome of this bailout will be any more successful than the last two. Unfortunately we have more deadlines to look forward to with the first been Wednesday night. Greece’s parliament must pass critical reform measures by that time to keep the agreement on track. China too, seems to have contained its stock market collapse for now at least, albeit mostly because trading in many stocks is still suspended. The initial impact of these recent developments has been a return of risk appetite to the market. That has benefited the USD more than anything as many now see the potential barriers to a Fed tightening this year as diminished. The timing of any rate hike is still very much up in there air, with September somewhat less likely than December at this stage.

Sentiment toward the Australian dollar has taken a big hit in recent weeks with iron ore prices having fallen by nearly 25% in the past month. Last week’s Australian employment data provided a brief respite for the currency, with full time employment gaining much more than forecast. However, concerns around the Chinese stock market and the implication for the broader Chinese economy, continue to weigh. Over the coming days we have data on business confidence, consumer sentiment and inflation expectations to digest.

New Zealand
There has been no economic data of significance released from NZ in the past week. In the coming days there are two key releases for the local market to digest. Tomorrow night we have another Fonterra GDT dairy auction, and then on Thursday morning we get inflation data for the second quarter. The market is expecting inflation to print around 0.5%. The falling New Zealand dollar will push inflation higher, but those effects will take time to flow through and it may not be until the second half of this year until it’s impact is really felt.

United States
Data from the United State over the past week has been largely uninspiring. After the Fed minutes suggested a slightly ‘dovish’ slant to FOMC proceedings, the market was keen to see if Yellen would give further insight when she spoke on Friday. In the end she pretty much stuck to her recent script, suggesting it would be appropriate to begin raising interest rates “at some stage this year”. She did add that in her own view there is ‘a little more slack’ in employment than the 5.3% unemployment rates suggests, and that slow wage growth is consistent with that view. Tonight to draw focus we have retail sales data and if there is one metric that raises concern about the US recovery, it is the lack of growth in consumer spending. Later in the week we get producer prices, inflation and consumer sentiment. We will also hear from Fed Chair Yellen again when she give her semi-annual testimony before a couple of senate committees.

United Kingdom
We have seen some encouraging economic data releases from the United Kingdom over the past week. The trade balance for May improved unexpectedly, as imports fell and exports to the Euro region climbed. The trade gap in goods narrowed to GBP 8 billion from 9.4 billion in April. Britain’s trade deficit is now at its lowest level in almost two years. This suggests that net trade may actually contribute to growth in the second quarter after acting as a drag in the first quarter. The Bank of England (BOE) credit conditions survey was released last night and shows credit for SME’s is at its highest level for five years. More than anyone, small and medium sized enterprises struggled to get funding in the years after the global financial crises and an easing of credit to that sector will be positive for growth. The report also showed the demand for mortgages is at its highest level in since the fourth quarter of 2013. That’s a clear signal of not only confidence in the economy, but also that real wage growth is expected to continue. Tonight from the UK we have inflation data and then later in the week employment and wage data. We will also hear from BOE Governor Carney who is set to testify in front of parliament’s Treasury Committee during the inflation report hearings.

With the basis of a deal between Greece and its creditors finally agreed last night, it hard to see who’s come out of this a winner. Greece is certainly a loser, but the negotiations opened up divisions within the broader European Union that will take a long time to heal. Former Italian prime minister summed it up best when he said “Greece has been devastated and humiliated. Europe has shown itself to be pharisaical and incapable of leadership and solidarity”. With Greece starring over the edge into the financial abyss, PM Tsipras caved in on virtually every demand and agreed to a deal much worse than what was on offer only two weeks ago. The Greek people won’t be happy, only 10 days ago they voted “no” to a package much better than the one just agreed to. It is likely to be political suicide for Tsipras and maybe even for the Syriza party. The real problem is the deal does nothing solve the issue of Greece’s long term debt sustainability. Tsipras claims that Greece has secured a debt restructuring, but the agreement offers no more than a vague promise on the debt issue. On top of this a fresh round of crushing austerity will impose self-defeating levels of fiscal contraction. This will cause the debt to GDP level to actually rise, which is exactly what happened after the previous bailouts. If the deal even makes it through the Greek parliament, and that looks like it will be a fight in itself, we will be back to square one within a couple of years. Europe has learnt nothing and this is German austerity at it most harsh. France and Italy, along with others, believe Germany has abused its power in the eurozone to push a narrow, mean-spirited agenda. Divisions like this, at the core of the Eurozone, are very unhealthy. In a sign that the market too is less than convinced about the appropriateness of the deal, the Euro has been losing ground since the announcement.

The past week has seen a couple of positive releases in the form of better than forecast current account balance and core machinery orders. The producer prices index remains soft however, and last night we saw a disappoint result from tertiary industry activity. The main focus this week is now on the Bank of Japan (BOJ) monetary policy statement set for release on Wednesday. Although the central bank is not expected to take any further action at this stage, there have been reports they will downgrade their growth forecasts. This may well be a precursor to action later in the year.

After disappointing results last week from the trade balance and building permits, Canada produced a positive surprise with better than forecast employment data on Friday night. Although overall employment was only slightly stronger than expected at -6.4K, there was a huge swing from part time to full time jobs. Full-time employment was actually up 64.8k. There is plenty to digest this week as well with the main event being the Bank of Canada (BOC) monetary policy statement on Wednesday night. With a number of recent indicators suggesting growth is failing to pick up from the poor first quarter the market now pricing in a 40% chance of an interest rate cut. Other data to watch out for includes manufacturing sales and inflation.

Major Announcements last week:
  • NZIER Business Confidence 5 vs 23 previous
  • RBA leave Monetary policy unchanged
  • UK Manufacturing +.6% vs +.1% expected
  • Australian Unemployment rate 6.0% vs 6.1% expected
  • Chinese Inflation 1.4% vs 1.3% expected
  • Canadian Unemployment rate 6.8% vs 6.9% expected
  • Australian Business Confidence 10 vs 8 previous