China and Greece Batter Aussie

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Market Drivers July 8, 2015

Greece has 5 day deadline to avoid bankruptcy
Chinese markets wreak havoc on risk FX
Nikkei -3.52% Europe 0.68%
Oil $52/bbl
Gold $1152/oz.

Europe and Asia:
JPY Eco Watchers 51 vs. 53.2

North America:
CAD Building Permits 8:30

USD FOMC minutes 2:00

The twin specters of Greek bankruptcy and Chinese stock market sell off weighed heavily on risk FX in Asian and early European trade but currencies stabilized by mid morning London dealing as all eyes are now on Athens with traders awaiting proposals from Mr. Tsipras.

The timetable with Greece now appears to be finalizing with the country making its proposal to the Eurogroup late this week and finance ministers debating the offer on Saturday and full Eurogroup meeting in an emergency session on Sunday to either approve a bailout deal or send the country into bankruptcy and possibly out of the euro currency union.

The EUR/USD was relatively nonplussed by the news as markets continue to believe that some sort of 11th hour rescue plan will take place and Greece will be allowed to stay in the union. The latest leaks from Brussels suggest that the new deal will likely provide 2-3 years of bailout funds and will then include some debt restructuring proposals to address the long term debt problems the country faces.

The next few days are likely to provide a more muted tone as markets remain in wait and see mode, but for the third weekend in row the EUR/USD may see a gap open regardless of whether a deal is done or not as speculators will move the currency either way.

Of much more immediate concern to the market was yet another sharp fall in Chinese equities. The Shanghai composite closed down another -6.75% despite various efforts by authorities to stem the losses including the formation of a large fund by countries biggest brokers to provide bid for the falling equities. Yet it was the fact that nearly 50% of all issues were suspended for trade, that created another wave of panic in Shanghai and equities sold off sharply with no bounce in sight.

Some analysts have pointed out that the fall in Chinese equities may not be as severe as it looks because the index is still up 66% for the year and because equity ownership in China is not nearly as prevalent as it is in the West limiting its impact on the wealth effect. Those points may well be true, but in capital markets its always the marginal buyer or seller that often makes the difference. Therefore the danger of knock on effects and potential large scale bankruptcies in the Chinese financial sector remains quite pronounced. All this comes at a time when Chinese economy is no longer enjoying double digit growth and the government will not be able to paper over the losses with ease.

The fall in Chinese equities and the ongoing saga with Greece have really taken their toll on Aussie which hit fresh six year lows today dropping to 7372 before finally finding some bids to trade back above the 7400 level. The pair is massively oversold and may see some sort of short covering rally, but the overall direction for the unit remains lower as the problems in China and the drama in Greece are likely to temper risk sentiment going forward and will force the RBA to cut rates further in the foreseeable future. With full effects of the rout in Chinese equity markets yet to be felt in the overall Chinese economy, the Aussie may be headed towards the 7000 figure as traders begin to price in the full impact of the events.

Boris Schlossberg
Managing Director

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