Markets focus on Greece bailout

Monday, 20 February 2012 - 7:30am

CURRENCY: Despite riding close to support levels, the market may well open with a risk on bias given the weekend cut in the Chinese RRR by 0.50% to 20.5%. Caution should be exercised, however, given the need for this cut.

RATES: Kiwi rates were quiet overnight and are likely to open unchanged.

REVIEW

CURRENCY: Attempts to scale past the all too familiar resistance at 0.6380 failed for the NZD as it took stock of the wider picture. The reversal late in the trading week was not enough to see it dip back below 0.8310.

GLOBAL MARKETS: With US data in line with expectations, markets were watching Greek headlines with increasing optimism regarding a deal. Equities rose in Europe and the US, with the latter approaching a 3-year high. US 10-year bond yields rose. Commodity prices, including oil, rose.

KEY THEMES AND VIEWS

GREECE IS THE WORD. Markets are hopeful Greece and its lenders may finally strike a bailout deal tonight. On Friday, Greece identified 125m euros worth of extra cuts, as required, including further cuts to pensions.

Eurozone finance ministers will meet tomorrow to seal the 130bn bailout, with Germany on Friday suggesting they intend to pass the bailout and the write-down in one package. That Greece has fallen relatively meekly into line reflects their reduced bargaining power as euro policymakers have gradually become more optimistic that the contagion from a Greek default would be contained; that the market has come to understand that Greece is a standalone (basket) case. This may be a little optimistic. Markets are currently focusing heavily on the success or failure of this one bailout deal, and have been for some time. But even if this canary is successfully resuscitated, the coalmine is in bad shape. The structural problems in Europe go well beyond Greece, and the markets will doubtless recall this once this particular drama has played out. Meanwhile reports suggest the ECB has swapped over its Greek bonds for new ones identical except for the fact that they are exempt from any collective action clauses. Making the ECB so unequivocally a preferential investor may in time have an unintended backlash for other stressed bond markets.

OTHER EVENTS AND QUOTES

� China cut the required reserve ratio by 50 basis points, a little earlier than generally expected. While this will be taken by markets as good news, it does suggest that policymakers are becoming increasingly concerned that the economic landing could prove somewhat bumpy. Japan has also flown in the face of increasing market optimism in the West and eased monetary policy this week.

� In the US, Congress extended the payroll cut until December.

� Iran ceases oil exports to France and the UK, in a pre-emptive strike anticipating EU sanctions.

� Japan and China step up to the mark, saying that they "are prepared to support the IMF's important role in addressing the European sovereign debt crisis" according to a statement from the Japanese finance ministry. Someone should perhaps suggest to Japan they put on their own oxygen mask before helping others.

NZDUSD: Tread carefully?

Expect any enthusiasm in risk this morning to be tempered by reality. The Chinese move on the RRR has been undertaken out of necessity and should temper any spike higher in the NZD. Reflection of markets may well see the NZD ease back towards support levels in the mid 0.82USD during the week.

Expected range: 0.8295 - 0.8375

NZDAUD: Still holding?

ANZ now sees another cut in the RBA cash rate not coming until their May meeting (versus previous March call). So expect this cross to struggle on topside moves given the interest rate differential persisting.

Expected range: 0.7740 - 0.7790

NZDEUR: Solution?but when?

A "solution" to the Greek debt crisis continues to be just around the corner. Not many are game enough to look around the corner for fear of getting run over. This cross should back off on optimism for a solution but Greek headlines will continue to plague the EUR.

Expected range: 0.6310 - 0.6350

NZDJPY: On the way?

Given the break of the USDJPY through another key resistance level and this cross moving above 66.13 questions will be asked whether this cross is now set for a move to 70.24 (10 year moving average). Patience is the answer.

Expected range: 65.80 - 66.60

NZDGBP: Failed again?

Further failed attempts at breaking above 0.53GBP have meant lower levels are likely to start this week. Support at 0.5220 may well be tested.

Expected range: 0.5220 - 0.5270