The RBNZ will release the July Rate Statement at 00:00 server time tomorrow during rollover, as well as any change to New Zealand’s overnight Cash Rate. The meeting could be a volatile one, as some analysts are expecting as much as 50 basis points to be cut from the current 3.25% rate during the remainder of the year – with one of those cuts possible at this meeting.
New Zealand has been one of the only developed market economies to increase rates in the last few years – as a strong economy and overheating housing market drove the monetary authority to try and put the brakes on. The tightening – which took rates from 2.50% to 3.50% over 2014 – was short lived and at the April meeting the RBNZ indicated it would need to start cutting rates again.
The RBNZ is able to cut interest rates now with more freedom in 2015; macro-prudential controls have come in to affect to slow growth and risky lending in the housing market, allowing more room to use monetary to stimulate other areas of the economy. Falling energy prices and global disinflation have helped to curb inflationary pressures in New Zealand, with the latest reading only 0.4%, providing another avenue of relief for the central bank.
Further driving sentiment lower, milk prices have continued to tumble to new lows after reaching a peak in early 2014. Dairy products make up around 30% of all exports from the small economy, and a price shock has weighed heavily on the value of production. This fall is echoed by the broader decline in commodity prices, which have been driven by supply imbalances in energy and iron ore production. The RBNZ has indicated that it sees the exchange rate moving lower and further rate cuts will assist this process, as well as helping the export market recover.
Analysts currently expect the RBNZ to cut interest rates from 3.25% to 3.00% at this meeting. A surprise no-cut would be likely to cause a dislocation in the heavily shorted market, however it could be accompanied by a dovish statement indicating further rate cuts were likely. The favoured outcome is for the rate cut to go ahead, and the focus to be on whether the statement offers a period of assessment before any further change or indication that further rate cuts are likely.
A seemingly quiet open rapidly turned in to a very volatile morning this week, when gold broke lower through a support at 1129.00 – triggering a panicked run on stops below the key level. Gold traded almost as low as 1070 USD per ounce, falling 60 USD in a matter of seconds; this is the lowest the metal has traded since January 2010. No fundamental trigger was attributed to the move, and it has since recovered to sit above 1100 USD later in the session.
News surrounding Greece and a potential exit from the Euro has died down substantially after the government conceded to a list of reforms, possibly worse than those it had already refused in a referendum. Greece is still locked in crisis management and a final solution is yet to fully take shape, but pressure has relieved somewhat leaving Greece temporarily out of the spotlight as it makes a scheduled payment to the ECB today using unlocked funds.
It is a fairly quiet week in terms of high impact news, though two central bank events are likely to be market moving and interesting for market watchers: The RBA’s Meeting Minutes (Tuesday 04:30 server time) and the RBNZ’s Official Cash Rate and Rate Statement (Thursday 00:00 server time)
The RBNZ Rate announcement could be the more interesting of the two, being a more important release. as well as coming out during roll-over – meaning a market gap could be likely. Currently analysts are on the fence between no change – leaving it at 3.25% – and a rate cut to 3.00%. Given a surprise rate cut in Canada last week and the rapid decline in commodity prices it is no certainty that rates stay on hold. Even if there is no change at this meeting, the decline in Milk prices, low global inflation and troubles in Greece and China – it is quite likely that the statement will make comment on the situation while could strongly affect sentiment in NZD pairs over this release. Traders are, as always, reminded to watch out for the release at this time and the potential for gaps.
The markets start the week on a mildly positive note, with Greece indicating it is ready to accept the terms of its deal with creditors – after initially rejecting slightly better terms. The pressure of a failing banking system and impending default has softened political will amongst the Leftist Syriza party.
While Greece has indicated it is willing to make a deal, it needs to get the proposed changes through Greek parliament before the deal can be considered a lock. For this process, creditors to Greece have allowed a 72 hour period in which Prime Minister Tsipras can push the changes through parliament before being considered to have failed.
If Tsipras can get the changes through in time, it unlocks the possibility of a new bailout package and much needed funds – estimated to be in the range of 70-100 Billion Euros – before it passes another missed payment to bondholders. Should the changes be too much to enact, Greece faces another precarious situation where it may need to leave the Euro or be temporarily suspended depending on how both parties choose the handle the situation. Either way, an outcome should be made public by Wednesday and could hit the market hard if it is decisive about the future of the Euro.
The changes Greece is being asked to pass are similar to those rejected last week, and include changes to taxation policy, pensions and retirement age as well as Greece asking for leniency on restructuring its debts and financing costs
Headlines to watch this week will include:
US Retail Sales on Tuesday at 15:30 server time – with economists expecting a moderate increase of 0.7% for Core Retail Sales, and 0.4% for Retail Sales month on month.
Chinese GDP on Wednesday at 05:00 server time – China is expected to continue growing strongly, but at a sub-7% rate of 6.9%
Bank of Canada Rate Statement on Wednesday at 17:00 server time – The BoC is thought to hold rates steady at 0.75%, but with Greece weighing on energy prices again it should be interesting to see what the statement holds.
The ECB Press Conference on Thursday at 15:30 server time – no change is expected in interest rates, but whatever happens in Greece in the period until Thursday will likely shape just how important the press conference is. If Greece is seen to default and potentially leave the Euro, the ECB meeting becomes one to watch very closely.
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The results are in from Greece’s Sunday referendum, and the answer is a resounding ‘No’ to austerity from the Greek people. The Greek citizens went to the polls over the weekend to decide whether the country should accept the terms offered by European creditors in order to access a new bailout deal. Pre-vote polls showed mixed sentiment towards the vote, but on the day the votes fell strongly one way – with the No vote receiving 61.31% of the vote, and the Yes vote receiving 38.69%.
The market gapped lower across the board – the volatility was less than a lot expected, though Euro gapped lower by over a cent against the US Dollar and over two cents lower against the Japanese Yen. The DAX fell sharply on the news, opening lower by 400 points on the widespread pessimism and safe havens were heavily bid at the open. Once the initial news spike was over, however, there was a bounce back and most currencies have now retraced their falls from the weekend.
With Greece rejecting the bailout, what happens next is still very much up in the air. The Greek people do not necessarily want to leave the Euro, but defaulting on obligations is doing little to spur healthy relationships with its creditor partners. The Greek government is most likely hoping that a new deal is offered to them in order to ensure the crisis does not escalate or contagion begin with other Euro partners.
Tspiras will want to return to negotiations – however he has indicated that debt relief could be a part of any future deal with creditors. With Greece already “in arrears” – meaning it has essentially defaulted on loans from the IMF – it is only a matter of time before the next payment falls due that cannot be paid. In the meantime, the Greek banking system is on thin ice, and any resolution in Greece will likely require a return to liquidity assistance from the ECB; should no deal be possible, it isn’t yet clear that the ECB will provide this – leaving the financial sector in great doubt.
While Greece will continue to headline proceedings this week, there are other hotspots of important news. The RBA announces its Cash Rate on Tuesday, at 07:30 server time – economists are expecting no change and the rate to hold at 2.00% at this meeting, but given the threat of Greece the statement may provide comment about contingencies if that situation were to get out of hand – including further rate cuts. The Australian data is also continued on Thursday, with the Employment Change and Unemployment to be announced at 04:30 server time – expected +100 jobs and 6.1% Unemployment respectively.
The FOMC Minutes on Wednesday are also likely to be very important. The Federal Reserve is really coming to the point where it can begin discussing interest rate increases in earnest. While the Fed did not raise rates at the previous meeting, the minutes provide important insight in to how close they came, sentiment within the committee, and fears in the domestic and world economy. The minutes are released at 21:00 server time and often precipitate increased volatility.
The situation in Greece has escalated over the weekend. Many assumed that a deal would simply be reached between the Greek government and creditors before the new week – however Prime Minister Tsipras’ decision to call a referendum on the proposed bailout deal has thrown markets in to turmoil on Friday night.
The Euro gapped lower by over a cent on the market open today, touching below 1.1000 in early trading. The flight from the Euro affected currencies across the board, with Yen pairs especially affected due to the flight to safety of the Yen – EUR/JPY fell several hundred pips by the time trading resumed today. Stock markets reeled on the news, with most markets in Asia down by 2% or more including the Nikkei and ASX 200.
The Eurozone decided not to offer any extension on the bailout offer beyond the Tuesday deadline. Greek parliament approved the referendum plans on Saturday, to take place on July 5th – after the expiry of the current bailout, and putting Greece at an almost certainty of technical default when its 1.6 billion Euro payment to the IMF comes due on Tuesday. The ECB chose not to backstop the Greek banking system with emergency funding or liquidity. Greek banks are running short on cash as concerned citizens look to withdraw their remaining funds, with long lines commonplace at ATM’s.
Because of the standoff in negotiations, and the swift timeline before Greece is in default, Tuesday should be a day to keep a watch on the news. Not only will Greece need to find a way to pay the IMF, but the Eurogroup will have another meeting – which could add to the volatility. Should no leeway be given to Greece – and it fail to make payment – many outcomes come in to play, including Greece exiting the Euro.
To pour fuel on a volatile week, this Thursday is also Non-Farm Payrolls day– which means the volatility can be expected right through to Thursday. Economists are expecting a continued steady jobs recovery in the week’s data. Analysts expect the Unemployment Rate to fall to 5.4%, and for the headline jobs number to be an addition of 231,000 employed people. With the turmoil in Greece, a strong jobs number could help push the US dollar to some new found strength. The announcement comes at 15:30 server time on Thursday.
Greek concerns continue to dominate the headlines leading in to this trading week, after the ailing country and creditors failed to come to a deal on extending Greece’s bailout on Thursday. Greece currently needs access to emergency funds to continue making payments and avoid debt default and a potential exit from the Euro; such a release of funds is conditional on Greece coming to the negotiations with a credible action plan on how to reform the failed economy. The ECB provided 1.75 billion Euros in emergency loans to Greece on Friday, to lessen the panic.
The Greek story will play out through the week – with those close to the discussions growing pessimistic that the situation is unworkable. Today the Euro finance ministers will meet for another round of emergency meetings, with rumours that Greece will try and push a deal through to end the crisis and standoff. Should no deal be made, Greece will likely be plagued by a crisis of confidence and further outflows from the banking system. The next chance for an agreement would be expected to come at Thursday’s (June 25) EU summit – which could truly be a last ditch effort to come to an arrangement. Should this fail, the Greek bailout will expire at June 30 – and after that there are a number of possible outcomes including default, restructuring or leaving the Euro entirely. This will be the story to watch this week.
In other news, US Final GDP will be an important release on Wednesday (15:30 server time) – as economists are now expecting a slight improvement in the growth figure after a woeful second estimate of -0.7%. Analysts now expect the US economy to have contracted at a rate of -0.2% in Q1 this year. This is expected to be backed up in Tuesday’s Durable Goods release, also at 15:30 server time, where forecasts are for an improvement in the month on month figures to 0.6% for the Core figure and -0.6% for Non-Core release.
The FOMC Statement at 21:00 server time today should be the headline event for this week – barring a sudden turn for the worse in Greek debt negotiations – with the reality of rising US interest rates drawing ever closer. If the Federal Reserve is to begin raising interest rates later in the year, as the market expects, then it will need to signal this intention beforehand to prepare market participants. There is a chance this could begin as early as today’s meeting, owing to the accompanying Press Conference and release of economic projections.
The market is still pricing the chance of a June rate hike at nearly 0% for today’s release, however that does not necessarily mean a lack of volatility should be expected. The Fed’s forward guidance is of more importance at this meeting, as it is quite possible that Yellen will signal a firmer timeframe on policy tightening ahead of an expected move at some point between September and December.
The flip side to this is a scenario where the Fed downgrades expectations for the economy and inflation, and plays down talk of raising interest rates this year. If this were to occur, Yellen would be indicating that the downturn in Q1 of this year was likely to be prolonged rather than transitory. This is not a widely expected outcome, as Yellen has said recently that she still believes the weather related Q1 weakness will not continue to be a factor, and that statistical noise may also explain part of it.
This FOMC statement brings an update on the Fed’s economic projections. Growth has been particularly weak in Q1 this year – weaker than estimates had suggested at just -0.7%. Concerns of this lasting longer than expected may result in an adjustment downwards of the Fed’s growth expectations, which could confuse any messages about rate increases and the market reaction – though with energy prices recovering strongly this could easily balance out the weakness from Q1. Market estimates do not place much chance of a rate increase until September at the earliest, and not confidently so until the October meeting – where probability currently sits at just over 50% – so for now all eyes will be on the statement wording rather than an interest rate adjustment itself. The Press Conference at 21:30 server time will also be a source of market disruption as Yellen explains any changes to the statement.
The Euro gapped lower at the open this week on pessimism over disintegrating Greek negotiations. Discussions between Greece and her creditors failed to come to a satisfactory outcome on Sunday, putting Greece back at risk of default on its debt obligations. The lack of a resolution means that the Eurogroup meetings on June 18th will be perhaps another ‘last chance’ for a deal that would see the Greek bailout program extended. Should a deal not be in play on Thursday, there is a very real chance Greece could exit the Euro and default on its obligations – sending shockwaves through Europe. Greek yields remain near recent highs and the Euro is down over half a cent from last week.
The FOMC statement will be the second major focus this week, with the reality of rising US interest rates drawing ever closer – turning from a ‘what-if’ to a question of when. The market is still pricing the chance of a June rate hike as essentially 0% when the FOMC statement is released on Wednesday the 17th of June, however that does not necessarily mean a lack of volatility. The Fed’s forward guidance is of more importance at this meeting, as it is quite possible that Yellen will signal a firmer timeframe on policy tightening.
This FOMC statement also brings an update on the Fed’s economic projections. Growth has been particularly weak in Q1 this year – weaker than estimates had suggested, yet still considered a temporary setback. This may result in an adjustment downwards of the Fed’s growth expectations, which could confuse any messages about rate increases, though with energy prices recovering strongly this could balance out the weakness from Q1. Market estimates do not place much chance of a rate increase until September at the earliest, and not confidently so until the October meeting – where probability currently sits at just over 50%.
Thursday also sees the release of New Zealand GDP and the Swiss National Bank’s Monetary Policy Assessment. The New Zealand GDP will be interesting, given the sudden downturn in expectations there that led the RBNZ to cut interest rates last week. The SNB policy assessment will be watched closely purely due to the fear the institution evokes following its January surprise of removing the exchange rate cap. The SNB is expected to hold rates steady at -0.75%, but traders should be wary for any eventuality.
The week is capped off with the Bank of Japan’s Policy Statement and Press Conference on Friday. The BoJ has been happy to keep policy steady and accommodative, however recent data has not indicated that the initial Abenomics euphoria and bump in the inflation rate due to the Sales Tax increase have not resulted in lasting inflation. The Inflation and Core Inflation figures sit at just 0.6% and 0.3% respectively at latest reading – far from a 2% goal for the near future. If the bank is considering any policy adjustments, the Press Conference will be a likely medium for forward guidance.
Tonight’s Non-Farm Payrolls figure out of the US will be crucial for giving the US dollar some direction after being range bound against majors like EUR, AUD and GBP for several months. Early in the year, bets were front loaded on a swift and sure tightening in US monetary policy – however, expectations have been tempered recently as the strong US dollar and crumbling commodity complex saw weak economic data through the first quarter. Recent US data has been weak, but expectations are for this to be a temporary setback:
- Last month’s Retail Sales were much weaker than expected at 0.1% and 0% for the Core and Non-Core figures respectively – expectations were for an improvement of 0.4% and 0.3%.
- GDP has been very weak at -0.7% for Q1, however this was a known factor and has not acted to further shock markets to a great extent.
Analysts are not betting on any major deviation from the trend today:
- ADP Non-Farm Employment data on Wednesday indicated a marginally better than expected result of 201,000 – up from 165,000 previously. The ADP figure is not always a great indication of month to month figures, but the trend is usually in line with NFP.
- For the Non-Farm Employment figure, analysts are expecting something of a goldilocks figure of 222,000 – essentially unchanged from 223,000 last month and keeping in line with a trend of mild recovery but not enough to stir calls for an earlier rate rise or raise fears of wage driven inflation.
- With the tepid growth in job numbers, the unemployment rate is expected to remain steady at 5.4% – the lowest rate since the GFC.
The figure will depend on any data surprise against this middle-of-the-road expectation, as well as any revisions to previous months. The release is scheduled for 15:30 server time.← Older posts