Calm before the storm

As we head into the referendum, it seems investors are growing increasingly nervous and this is being reflected in the price action.

Source: Bloomberg

US markets are closed on Friday and focus was mainly on the US non-farm payrolls report, which came in just shy of estimates but still recorded solid growth. The US economy added 223,000 jobs in June (below estimates of 231,000) while the unemployment rate dropped to a better-than-expected 5.3%. However, average hourly earnings were a disappointment as they came in flat.

There was around 60,000 worth of downward revisions for the previous couple of months and the six-month average slipped to 208,000 (from 226,000). All up, this data saw some life come out of the greenback with the dollar index pulling back from a one-month high; even the euro managing to regain some ground.

Despite the setback, traders are still likely to be looking to buy dips in the greenback against some risk currencies like the CAD and NZD. The crucial event for the greenback will be next week’s FOMC meeting minutes release, along with a raft of fedspeak and Janet Yellen herself.

AUD stutters on retail sales

Asian equities are mostly risk-off and traders are somewhat unwilling to commit heading into the Greek referendum. The AUD has seen some downside after May retail sales came out slightly worse than expected. The market was looking for a 0.5% rise in May but this reading came in at 0.3%. This took some sting out of the AUD, particularly against the kiwi.

The household goods component of retail sales continues to show signs of improvement and I suspect it’ll lead to a rebound for June data with a bit of a tailwind from the budget. AUD/NZD traded to a high of $1.1430 yesterday, the highest level since November 2013, with the global dairy trade index dropping for eight consecutive sessions.

However, I feel the fundamentals remain in favour of the AUD. The decline in global daily trade prices is likely to mount pressure on the Reserve Bank of New Zealand to ease again this month. This would see a back-to-back rate cut and would continue to see calls for further easing ramp up. Any dips below $1.1300 are likely to be used as a buying opportunity by traders.

European uncertainty looms

Heading into European trade, we are calling the major bourses relatively flat. Needless to say, attention will be pinned on Greece and this is likely to see investors cautious as we head into the weekend.

In a nutshell, both the yes and no vote seem to bear significant risks for global markets. In the event of a yes vote, we already know finance minister Varoufakis has said he’ll resign and there’ll also be plenty of questions around whether Prime Minister Alexis Tsipras will hold on to power.

A yes vote risks seeing Greece plunge into fresh political chaos. Even if we get a yes vote, this means the country must go back to the negotiation table and try to knock something together again.

However, it’s a lot worse on the other side as a no vote will present a host of uncertainties that could really rattle markets. In terms of logistics, the wider the yes or no vote, the sooner the results will be known. Either way, traders will need to buckle up for a tumultuous Monday.

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