Euro crisis fears resurface with a bang on Greek referendum proposal

By Mike Burrrowes

NZD

The NZD fell sharply overnight after the Greek Prime Minister announced plans for a referendum on the Greek bailout package (see below for more details). This has seen risk aversion spike higher and NZD/USD fall from 0.8050 to a low of 0.7920. NZD/USD is currently trading around 0.7950.

The Fonterra dairy auction largely passed unnoticed overnight. The average dairy price fell 1.2% in USD terms, solid enough given the recent global ructions. We are watching commodity prices as one important channel that the issues in Europe and concern around global growth will feed through in NZ. To date, the impact on dairy prices has been relatively mild. So not enough to change the RBNZ’s view that interest rates will head higher next year as the economic recovery evolves.

It has been a volatile 24-hours of trading in NZD/AUD. The cross appreciated from 0.7660 to above 0.7720 after the RBA cut rates by 25bps (see Majors section below). However, overnight the cross has consolidated around 0.7670. The NZ-AU 3-year interest rate differential has moved from -109bps to -92bps over the past 24 hours, suggesting the cross should be trading above 0.7800.

Looking to the day ahead, there is no local data due for release. Across the Tasman, we have building approvals for September. On the day, support for NZD/USD is seen at 0.7910 and resistance at 0.8030.

Majors

Just when it appeared the European debt crisis was easing, the Greek Prime Minister has caught markets offguard with his call for a referendum on the Greek bailout package. This saw a surge in “safe haven” demand for the USD and JPY. The risk sensitive AUD, CAD and NZD were the worst performing currencies over the past 24 hours.

The renewed fears of a ‘disordely’ Greek default saw risk assets hit across the board overnight. The Euro Stoxx 50 index plunged over 5.3%, with the financials sector shedding 8.9%. This highlights investors are most concerned about the ability of the banking system to withstand a sovereign default. Our risk appetite index (scale 0 – 100%) fell from 34.5% 30.3%. Growth sensitive commodities were also hit, with both WTI oil and copper falling over 3.4%.

The Greek Prime Minister Papendreou has sideswiped markets overnight by announcing a referendum to approve the second bailout package, possibly in January. The Greek Prime Minister said he would also ask for a confidence vote. The debate is expected to begin on Wednesday, with a confidence vote expected on Friday. These two events have the potential to derail the EU rescue package before the final details have been resolved. Indeed, overnight German Chancellor Merkel and French President Sarkozy noted “more necessary than ever [to implement the EU rescue package] after Greek referendum call”

With the risk of a ‘disorderly’ Greek default back in play, EUR/USD plunged over 2 cents to an intra-day low around 1.3620. Early this morning, EUR/USD has partially recovered to 1.3740 after a Greek Socialist party official suggested the referendum was “basically dead”.  

The risk sensitive AUD/USD was hit hard overnight, plunging from around 1.0540 to an intra-day low of 1.0270. The partial recovery in sentiment early this morning has helped AUD/USD bounce to 1.0380. The weakness in the AUD started after the RBA cut interest rates by 25bps to 4.50% yesterday. On the announcement, AUD/USD shed around ¾ a cent, reflecting a market that was only 80% priced for such a move. The accompanying statement suggested further rate cuts would be data dependent.  

In the backdrop of rising risk aversion, the USD’s appeal as a “safe haven” was in full force. The USD index rallied 0.8% to 77.20. Despite the Bank of Japan’s intervention on Monday, the JPY held steady around 78.20 against the USD overnight. This highlights that central bank intervention must be sustained in order to have a lasting impact on a currency.

GBP/USD managed to hold-in better relative to the other major currencies overnight, falling from 1.6080 to 1.5990 currently. UK GDP for Q3 beat expectations (0.5% vs. 0.3%q/q expected). However, UK PMI manufacturing data for October (47.4 vs. 50.0), released at the same time, tempered any gains in the GBP.

Looking to the night ahead, expect the focus to remain on the European debt crisis. Markets will be looking for some clarity on whether the Greek confidence vote and referendum will go ahead. On the data front, we have PMI manufacturing data for Europe and German unemployment. In the US, the ADP employment data will be used as a guide to Friday’s non-farm payrolls. Early tomorrow morning, we have the FOMC statement. No change in rates or QE is expected. 

Mike Burrowes is part of the BNZ research team. 

All its research is available here.