No new money for Greece until after proposed referendum

By Mike Burrrowes

NZD

The NZD was the worst performing currency over the past 24 hours, falling from 0.7940 to 0.7880. The risk sensitive AUD has also struggled, falling 0.2% over the past 24 hours. The losses in NZD/USD were suffered early this morning after some negative comments from the EU and more upbeat assessment of US growth by the FOMC.   

The NZD steadily lost ground against both the EUR and GBP overnight. NZD/EUR started the evening around 0.5790 to 0.5730 currently. Expect trading against the EUR to remain volatile as the European debt crisis is far from resolved. NZD/GBP fell from 0.4970 to 0.4940.

NZD/AUD lost ground overnight, probing below 0.7650. Today’s NZ employment data will be key for near-term direction in the cross, although Australian retail sales also have the potential to knock the cross around. The NZ-AU 3-year interest rate differential continues to suggest the move lower in the cross is overdone. If the NZ-AU 3-year interest rate differential can hold around its currently level of -97bps, we think the cross should move back above 0.7800 in the near-term.

On the day, support for NZD/USD is seen at 0.7840 and resistance at 0.7960.

Majors

Risk appetite staged a modest recovery overnight as concerns over an imminent default by Greece were tempered. However, the FOMC statement this morning saw the USD partially recover early losses. The USD index initially fell 0.8%, but has recovered to be down 0.3% at 77.10 currently.

The recovery in risk appetite saw the S&P500 index and Euro Stoxx 50 Index gain 0.9% and 1.4% respectively. The VIX index (proxy for risk aversion) eased from 34.8 to 34.0, but still remains very elevated.
EUR/USD spent the evening recovering the previous day’s losses, reaching an overnight high of 1.3830. The recovery was helped by hopes the Greek government will survive this week’s confidence vote.

However, the situation in Greece is still hanging in the balance. Overnight, the EU and IMF noted they will not release the next aid payment to Greece until after the proposed referendum. This raises the chance of a ‘disorderly’ Greek default. The EU’s Barroso had some wise words for the people of Greece, noting “without EU/IMF programme, conditions for Greek citizens will become much more painful”.

Data outturns in Europe were not flash. German unemployment for October increased 10k (vs. -10k expected). This saw the unemployment rate rise to 7% (vs. 6.9% expected), its first increase in 29 months. European PMI manufacturing for October slipped to 47.1 (vs. 47.3). While the German PMI manufacturing improved, it still remains below the important 50 level (49.1 vs. 48.9 expected).

There was nothing new in the FOMC statement released this morning. The Fed acknowledged stronger growth in Q3 as the Japanese tsunami impact wanes. The USD index has firmed following the statement, suggesting some in the market were positioned for a stronger hint of QE3 from the Fed. The USD index has bounced from 76.80 to 77.10.

The US ADP employment survey for October was better-than-expected (110k vs. 100k expected), but was overshadowed by developments in Europe. The ADP number suggests some upside risk to Friday’s non-farm payrolls number, where expectations are for a 95k increase.

GBP/USD made steady gains throughout the evening, rising from 1.5950 to 1.6020. Sentiment towards the GBP was helped by better-than-expected UK PMI construction for October (53.9 vs. 50 expected). Following the FOMC statement, GBP/USD has dropped to 1.5950.

Looking to the night ahead, expect the focus to remain on the European debt crisis. In addition, we have the ECB interest rate decision, where the market is pricing around a 40% chance of a 25bp cut. This is the first meeting for the new ECB President Draghi. On the data front, we have US ISM non-manufacturing data and factory orders.

Mike Burrowes is part of the BNZ research team. 

All its research is available here.