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Markets in risk mode

Contributor:
Fuseworks Media
Fuseworks Media

CURRENCY: Markets continue to demonstrate little caution and remain in a risk on mode today with the lingering effects of the US holiday likely to limit ranges. Underlying demand and yield hunting remain key themes.

RATES: After getting squeezed higher into the NZ close yesterday, long end NZ swap yields came off in London, but the short end was paid higher, which will create a flattening bias today. RBNZ inflation expectations data will set the scene today. Expectations have been drifting up, and it is crucial they fall.

REVIEW

CURRENCY: The expected higher NZD open yesterday was duly delivered but attempts to make it through recent highs were very tentative. These were marginally reversed overnight as buying support emerged.

GLOBAL MARKETS: An extremely quiet day in Europe, which started on a positive note after the Asian session. The Bundesbank surprised with some upbeat comments, saying the German growth outlook had improved "perceptively". Equities were stronger, and EUR is higher, taking AUD and NZD with it. European sovereign bond spreads generally narrowed, with UK and German 10-year bond yields up 3-4bps, while most peripheral bond yields fell back with the exception of Portuguese yields, which remain under pressure. Oil prices rose, with the spread between Brent and WTI narrowing.

KEY THEMES AND VIEWS

ALL EYES ON GREECE. With the US out for the Presidents Day holiday and virtually no data out, all eyes were on Greece. The all-important Eurogroup meeting started a few hours ago, and as yet nothing has slipped out. Most of the headlines thus far have been positive. The only downbeat headlines were comments from the Dutch FinMin, De Jager, who was stated the obvious: that the Eurogroup cannot approve the 2nd bailout unless Greece has met all of its obligations. With the Greek parliament voting through the required additional austerity measures last week and identifying a further ?325m of savings over the weekend, on paper it would seem they are there. Germany seems confident of a result, with FinMin Schaeuble noting that "we still have a bit of work to do", but "we've set out to wrap up the decision on a new aid program for Greece. I'm confident".

WHAT NOW? As we edge closer to a successful "conclusion" of the Greek bailout, we can't help wondering whether it really will be seen as a success. Markets are certainly in a jubilant mood, but the same can't be said about the remainder of Europe's finances. It might be contrary to say it, but with oil prices rising, and markets only able to see the good in a Chinese policy easing (ignoring the reasons for the move in the first place), are the foundations for disappointment being laid? They could be.

OTHER EVENTS AND QUOTES

The Telegraph (UK) headline: "Germany drawing up plans for Greece to leave the euro". The article opens stating that "Plans for Greece to default, potentially leaving the euro, have been drafted in Germany as the European Union begins to face up to the fact that Greek debt is spiralling out of control - with or without a second bailout". One would presume this is Plan B.

NZDUSD: Step by step?

No going backwards today with markets now expecting the US equity markets to post a solid start to the week tonight. Rising local yields and underlying support continue to provide solid reasons to be long NZDs. Today moving above recent highs will not be an easy task.

Expected range: 0.8380 - 0.8430

NZDAUD: Ticking along?

Further moves higher on this cross may be tempered today after the release of the RBA meeting minutes this afternoon. Rising NZ interest rates however will assist to ensure any dip on this cross is well supported.

Expected range: 0.7780 - 0.7830

NZDEUR: Getting close?

Things appear to be getting closer for Greece. Arguably as many suggest the current "solution" will not solve the problems of Greece which is in for a decade long journey. Expect this cross to remain supported but unable to make headway given the support for the EUR currently.

Expected range: 0.6310 - 0.6350

NZDJPY: Wild thing?

Yield demand and a record Japanese trade deficit assisted in helping this cross higher yesterday. Despite being on target for a move towards the 10 year moving average (70.24) there is significant resistance at 68.30 that will take some momentum to break.

Expected range: 66.20 - 67.20

NZDGBP: Back on top?

No chance of testing support levels when the NZD is in party mode and has a more attractive yield advantage. Topside attempts should be thwarted by selling interests currently around 0.5310.

Expected range: 0.5270 - 0.5310

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