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FX Update - Will we see an end to the prolonged Greek tragedy?

Written by Ian Dobbs on June 23rd, 2015.      0 comments

Market Overview:
Greek negotiations continue to draw a lot of attention at the moment as a potential Greek exit (Grexit) provides the biggest near term risk factor for markets. There were some positive signs in the wake of an emergency meeting last night, but no final deal as yet that would allow the release of badly needed bailout funds. If an agreement is reached in the coming days the market can then then get back to focusing on other risk factors. For Australia and New Zealand one of those risk factors is the health of the Chinese economy. Last week proved to be a very tough one for the Chinese stock market that can only be described as one epic bubble. Gains over the past year have been phenomenal as anyone and everyone, including peasant farmers and high school dropouts, opened margin trading accounts. Reality kicked in hard in the past seven days however with the market falling 10%. On Friday alone at one stage the market was down 6.5%. Credit has once again started to flow more freely in China spurred on by recent interest rate cuts, and even house price declines have abated in some cities. Business sentiment has also improved, but an ugly stock market correction could undo much of this recent progress.

There has been nothing released from Australia over the past week to materially impact the current outlook. A small fall in the leading index released last Wednesday may signal a further loss of momentum in the economy, but it’s only a second tier indicator and one small piece of a much bigger picture. The Reserve Bank of Australia (RBA) maintains something of an easing bias, although comments from Governor Stevens a couple of weeks ago suggest the bar for further action is set quite high. It seems he’s not convinced of the benefits of cutting rates further with households largely unable to increase borrowing further to dive spending. Any real boost to the economy needs to come from increased business spending and investment, which is something recent capital expenditure data suggest is some way off.

New Zealand
Yesterday saw a number of second tier data releases from New Zealand which didn’t impact the currency at all, but do add to the broader picture of the current economic situation. Consumer sentiment fell to 113.0 from 117.4 prior. Although that is it’s lowest reading since early 2013, the overall level is still reasonably healthy. Any reading over 100 in the index indicates optimists outnumber pessimists. We also saw migration rise to a new annual record in May, the tenth month in a row it has done so. In the year to May 2015 57,822 people moved to NZ and forecasts are for migration to peak around the 60,000 level later this year. The growing population will continue to support house prices while also driving increased consumption. The New Zealand dollar has remained relatively heavy after last week’s disappointing GDP data. Most forecasters now expect the RBNZ to cut interest rates again next month, with a very high risk of a third cut later in the year. Goldman Sachs recently released a report calling for three more cuts from the RBNZ this year, which would take the cash rate all the way back to 2.5%. The only other data we have out this week is the trade balance on Friday. Expectations are for a trade deficit of 50m.

United States
Last week’s FOMC (Federal Open Market Committee) statement provided little in the way of clues or guidance as to when the first interest rate hike will be. Most in the market still believe September is the most likely time for a lift off in rates, although those expectations won’t have been helped by inflation data released late last week. Inflation came in a touch below forecast on both the headline and core readings. This won’t be putting any pressure on the more dovish members of the FOMC to vote for interest rate increases any time soon. The Fed’s Williams recently said while he still believes the Fed will raise rates this year, he is in ‘wait and see’ mode due to low inflation. The more hawkish members of the FOMC will point to the job market, which as the Fed’s Mester says is ‘at or nearly at’ full employment, to justify rate increases sooner rather than later. Weekly jobless claims fell again on Thursday to 267k which is consistent with very solid employment growth. Continued employment gains along the line of what we have seen over the past couple of months should eventually lead to wage, and inflation pressure. The other notable data point released on Thursday was the Philly Fed manufacturing index. It came in much stronger than forecast completely contradicting the much softer reading from the Empire State manufacturing index seen earlier in the week. Last night’s existing home sales data was also strong with sales jumping to a five and a half year high. Still to come this week we have durable goods orders, manufacturing PMI, GDP, personal spending and consumer sentiment.

United Kingdom
The United Kingdom has seen mass demonstrations in recent days as anti-austerity protesters took to the streets once again. George Osborne has pledged to stick to his planned GBP 12bn in welfare cuts as the government continues to rein in spending. The recent convincing election victory suggests the protests won’t have much impact and it’s hard to disagree with the Conservative government's belief that the country can’t continue to live beyond its means. Confidence in the sustainability of government finances is key to the long term stability of any economy. The UK only has to look to parts of Europe to see how quickly things can turn sour when markets lose that confidence. Recent data on Public Sector Net Borrowing (PSNB) suggest the UK government is making good progress. Borrowing was lower than forecast and has fallen 5.1bn so far this financial year. Strong tax receipts helped with the best May result for four years. Late last week we also got a better than forecast reading from retail sales which increased 0.2% vs 0.0% expected. This week the economic calendar looks a little light with the main focus being a speech from Bank of England (BOE) Governor Carney on Friday.

European data has been all but completely side-lined by the ongoing and protracted Greek bailout negotiations. Time has almost run out for some sort of solution that would enable Greece to make its EUR 1.6bn payment to the IMF at the end of this month. There was little progress late last week, but hints of a potential deal after an emergency meeting last night have started to emerge. The Greeks submitted a proposal that the EU’s Moscovici described as ‘solid’. The Athens stock market rallied over 10% on the news and it can’t come soon enough for the Greek banking sector. Funds have been fleeing Greek banks over the past few weeks and the Greek banking system has only been kept alive by liquidity support from the European Central Bank (ECB). Nearly EUR 4bln was withdrawn from Greek banks last week alone and there was talk of capital controls being introduced to halt the exodus. They won’t be needed if a deal is reached, although from all accounts there is still plenty of work to be done over the next 48 hours. The risk is however, that any last minute deal will only have been cobbled together to avoid a default in the near term and won’t go far enough to address the long term sustainability of Greece’s debt. We could easily be back to square one in another 12-18 months. That has certainly been the pattern since 2010. Manufacturing and service PMI data will try to draw attention over the coming days, as will German business climate and consumer confidence indicators.

The Bank of Japan (BOJ) released their latest monetary policy statement on Friday. The central bank left policy settings unchanged after their meeting and said the economy continues to recover moderately. The BOJ’s reasonably upbeat assessment of the economy runs at odds to most economic forecasters who believe the bank will have to expand monetary stimulus later this year in order to help achieve their inflation target. Probably the most interesting thing to come out of the meeting was the announcement of a shakeup in the bank's communication policy. The bank is promising new transparency and will start punishing individual economic forecasts by its board members. They will be the first central bank in the world to do this. They will also cut the number of policy setting meetings from 14 to 8 next year and publish summary minutes a week after each meeting. The bank failed to clarify its view on the appropriate level of the exchange rate after recent conflicting comments from officials that caused significant volatility. This week to draw focus we have manufacturing PMI, household spending, inflation and unemployment data.

Last week provided some very mixed data from Canada. A fall in manufacturing sales was countered by an improvement in wholesale sales. Inflation came in stronger than forecast, but retail sales disappointed badly with a surprising fall. The retail sales number is however two months old, being the result for April, and as such it may just be an overhang from the very poor first quarter. The Bank of Canada (BOC) is confident about an economic recovery over the rest of the year and they will want to see a bounce back in retail sales over the coming months. The better than forecast inflation number, which was for May, will encourage the central bank, although slack in the economy will likely keep trend inflation below the 2 percent target for the foreseeable future. There are no releases of note scheduled for this week from Canada.

Major Announcements last week:
  • UK Inflation +.2% for month as expected
  • UK Unemployment 5.5% as expected
  • UK Ave. Earnings +2.7% vs +2.1% expected
  • European Inflation +.2% for month as expected
  • US Fed leave monetary policy unchanged
  • NZ Q1 GDP +.2% vs +.6% expected
  • UK Retail Sales 4.4% vs 4.5% expected
  • European labour Costs +2.2% against 1.2% previous
  • US Inflation 0.0% vs +.2% expected
  • Canadian Inflation on month +.9% vs +.8% expected
  • Canadian Retail Sales -.1% vs +.7% expected