NZD/USD is biased to rally as markets bathe in the afterglow of the Greek election

by Mike Jones

NZD

After spending most of last week marching higher, the NZD has continued to climb this morning. A spurt higher in the EUR has dragged the NZD/USD above 0.7900 for the first time since early May.

Globally, markets are cheering the apparent victory of the pro-EU, pro bailout New Democracy (ND) party in the weekend’s Greek elections. A ND-led Greek government is seen as more likely to keep Greece in the EU for longer.

Easing Grexit fears has seen stock futures open the week stronger, and the EUR/USD has leapt around ½ cent to 1.2700. Against a backdrop of improving risk appetite and a rising EUR, the NZD/USD was pulled up to around 0.7900.

Last week, financial market sentiment was buoyed by hopes policy makers will once again ride to the rescue of the global economy. Spain received a €100b bailout for its banks. UK policy makers announced new policy measures to combat the EU debt crisis. Central banks said they stand ready to inject liquidity. Finally, expectations began to mount that the FOMC will announce some form of additional stimulus this week.

Stock markets rallied (the MSCI World Index rose 2.1% over the week) and our risk appetite index (scale 0-100%) surged from 40% to 48.5%. The improving global backdrop, combined with a less dovish outlook from the RBNZ, ensured the NZD was the strongest performing currency over the week.

Locally, this week’s feature event is Thursday’s Q1 GDP. BNZ economists are looking for a reasonable 0.6% expansion. The market is looking for 0.5%, and the RBNZ 0.4%. A disappointing number would weigh on the NZD, but reaction may be limited by the fact that a) the data are backward looking, and b) growth indicators for Q2 are already looking strong.  Elsewhere, there are also current account figures (Wed) and dairy auction results (Wed morning) to look out for.

Nonetheless, direction for the NZD will continue to be determined offshore. In the short-term, we suspect the NZD/USD is biased to rally further as markets bathe in the afterglow of the Greek election.

Whether the good vibe continues will depend on the outcome of the G20 meeting (disappointment likely) and Thursday morning’s FOMC decision.

Expectations of more stimulus from the Fed has taken a small toll on the USD of late. Should the Fed disappoint the market, the consequent strengthening in the USD would knock some of the wind out of the NZD/USD. All up, the stage looks set for some volatile trading inside a 0.7850-0.8050 range this week.
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Majors

All eyes are on Greece as we begin a new week. Markets look to have got the result they wanted from the weekend’s Greek election. The pro-EU New Democrat party has won 29.5% of the vote, allowing them to form a coalition with one or both of PASOK (12.3%) or the Dimar party (6.2%).

Equity markets, the EUR and ‘risk-positive’ assets are rallying as investors breathe a collective sigh of relief.

The EUR/USD has opened the week a bit over ½ cent stronger around 1.2700, and S&P500 futures are currently up around 0.9%. The reaction in markets has been limited somewhat by the fact a market friendly result was partially priced in on Thursday and Friday last week.

Official results are due around mid-morning. Confirmation of an ND victory should keep risk sentiment positive. From there, focus should begin to shift elsewhere, with a slew of important news and events set to buffet markets this week. Greece will not stray too far from the spotlight, however, as the major parties begin negotiations to form a new government. This could take several days. After that, the new party begins bailout renegotiation plans with the Trioka. As we wrote on Friday, this is not the end of the Greek saga.

The G20 summit runs for today and tomorrow. World leaders are likely to reaffirm their commitment to a strong Europe and increase loans to the IMF. But aside from all the rhetoric and handholding, we doubt we’ll see any firm action plan or policy measures. As such, markets could end up disappointed.

Thursday morning’s FOMC meeting will also be important. The recent run of softer US data and sliding confidence in the global economy has markets hoping for ‘something’ from the Fed. This may take the form of QEIII or an extension of Operation Twist. The former is not fully priced and would likely undermine the USD, particularly USD/JPY. The latter would inspire little reaction.

Other news:
Germany’s Merkel shows signs of being willing to delay austerity measures for Greece in return for their commitment to the current bailout programs. * French elections confirm the Socialist party have gained an absolute majority in the parliament for the first time since 1993. This strengthens Hollande’s bargaining power within Europe.

Event Calendar:
18 June: G20 Summit; NZ consumer confidence; CH property prices; ECB’s Draghi speaks; 19 June: RBA Board minutes; UK CPI; NZ dairy auction; US housing starts; GE ZEW; 20 June: FOMC meeting & Bernanke speaking; NZ current account; UK BoE minutes  21 June: Eurogroup meeting; European PMIs; Auditors publish Spanish banks’ recap needs; NZ GDP; US jobless claims; US Phillie Fed;  22 June: NZ bus confidence; NZ credit cards; EU fin mins; GE IFO; EU leaders meet;

All its research is available here.