Talking Points:
- Traders May Ignore German IFO Data on Limited ECB Expectations Impact
- Euro May Rise on Bets Eurozone Officials to Reach Deal on Greece Funding
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Currency markets are likely to look past the release of Germany’s IFO Survey of business confidence. With the ECB seemingly on auto-pilot for the time being, the outcome is unlikely to produce a significant inflection point for near-term policy expectations.
Instead, traders will focus on rhetoric emerging from a meeting of Eurozone finance ministers and central bankers due to begin in Riga. On-going negotiations between Greece and its EU/IMF creditors will be in the spotlight, with Athens to present the fourth revision of a reform package designed to unlock further bailout funding.
Both sides of the Greek fiasco seem vested in a successful accord. EU and IMF officials want to avoid setting a precedent for a sovereign default within the Eurozone that potentially leads Greece out of the currency bloc. Meanwhile, Prime Minister Alexis Tsipras and company surely understand that disorderly redenomination will probably compound their country’s economic woes and may cost them their jobs.
The markets seem to agree: Greek 5-year CDS spreads and benchmark 10-year bond yields turned sharply lower earlier in the week, pointing to ebbing tail risk ahead of the Riga sit-down. Indeed, with Greece running out of cash to stave off insolvency, officials on both sides no doubt feel a sense of urgency to hammer out a deal and may prove more pliable than previously.
On balance, the announcement of an agreement that keeps Greece afloat – even if only in the near term – is likely to send the Euro higher as dissipating near-term default risk clears the way for profit-taking on elevated bets against the single currency. Indeed, the CFTC’s COT report puts net-speculative short positioning near the highest on record as of last week. We will treat a bounce as an opportunity to sell EURUSD in line with our long-term outlook in the weeks ahead.
