CURRENCY: Expecting a relatively subdued range with continued NZD support until the FOMC meeting tomorrow night. Further QE options if tabled are likely to boost NZD. The risk to this view is a G20 statement.
RATES: Kiwi rates are expected to give back a portion of yesterday's rise in yields with the post-Greek election 'risk-on move' quickly running into resistance in the European session.
CURRENCY: The removal of the "Grexit" from Europe's imminent future was initially seen as a positive by non European markets. European woes refocus on Spain sending "old world" currencies lower.
GLOBAL MARKETS: Yesterday's modest relief rally in risk assets following a reasonably positive Greek election result quickly unwound during the European trading session. The Euro Stoxx 50 ended down 1.2%, the EUR slipped back below 1.26 and peripheral bond spreads widened. Perhaps most disconcerting was the reaction of Spanish 10 year yields which rose +27bps to fresh euro high of 7.08%. Italian yields rose 15bps to 6.05% while Bund yields rallied 3bps to 1.41%. Treasuries were little changed despite further gains to the NAHB homebuilder's survey.
KEY THEMES AND VIEWS
GREEK ELECTION UPDATE: New Democracy leader Samaras has been given 3 days to cobble together a coalition government. A two-party alliance with PASOK seems most likely, giving the coalition 162 of 300 seats. Additional backing from the Democratic Left would see this majority rise to 179 seats. Syriza have said they will refuse to take the mandate to form a government should the 3-day window pass without resolution. Reports suggest the new government will seek a two-year extension in meeting fiscal targets (to 2016); while Merkel has reiterated that Germany will not accept any leeway. A game of chicken on the grandest scale continues to play out, and it seems that only a nasty accident will elicit a policy response or softening in stance. Yesterday's positive market reaction proved to be short-lived on realization that the Greek economy faces a fifth year of contraction, debt to GDP remains in excess of 160% of GDP, and the screws of austerity are set to tighten further with ?11.5bn in additional measures required by 30 June. On a more positive note, Fitch has said that the Greek election result removes the short-term risk of sovereign credit ratings cuts in the euro area.
THE SPOTLIGHT RETURNS TO SPAIN: For the second time in as many weeks, Spanish bond yields rose in response to what was perceived to be a positive outcome for the Eurozone, hitting an intraday high of 7.24%. Levels in this region are considered unsustainable and we could soon see reactivation of the ECB's Securities Market Programme. Markets await any news from G20 on coordinated market intervention. Brace for ongoing volatility.
OTHER EVENTS AND QUOTES
� A G20 draft communiqu� urged the Eurozone "to find ways to break the 'feedback loop' between sovereign states and banks". And?
� Pimco's Bill Gross: "Investors! Wake up and smell the ouzo! Elections which ratify more and more debt cannot cure a crisis".
NZD/USD: Demand is constant?
Demand overnight proved constant in the face of continued European concern. Barring a negative event, continued demand for NZD is likely, particularly if further liquidity is provided or suggested in the US.
Expected range: 0.7830 - 0.7950
NZD/AUD: Mid range ?
The rates differentials still point higher for this cross, however we are now mid range and see decent technical resistance at 0.7850-0.7875.
Expected range: 0.7790 - 0.7860
NZD/EUR: European stalemate increasing EUR woes?
We are still circumspect on Europe and despite the fact that Greek Euro exit has been removed as an immediate risk there is still Spain, and growth (France) vs austerity (Germany) to play out.
Expected range: 0.6250 - 0.6350
NZD/JPY: Key barometer
Will the safe haven be required or will Central bank actions see yield in demand. At the moment yield is winning. Don't forget the BOJ though, as they have a mandate to suppress excessive moves.
Expected range: 62.00 - 63.00
NZD/GBP: GBP strength puzzling?
The BOE indicates further asset purchases are likely amid unconventional easing. This should weaken GBP, but a European safe haven label, has seen demand for GBP keeping this cross weaker than expected.
Expected range: 0.50 - 0.5075
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