- Greece given a five-day deadline
- Deliver or bust for Greek banks
- Euro yields suggest contagion corralled for now
- Investors to focus on FOMC minutes
For most traders and investors, this week has been difficult to keep up with ‘who is who,’ and ‘who said what’ about Greece from a Eurozone, Eurogroup or Euro finance minister’s perspective.
Opinions, comments and Greek fiscal solutions have been bantered about across all media, confusing even the most agile of traders. However, the message that followed yesterday’s meeting of European officials was simple and uncompromising – Sunday, July 12th will decide Greece’s fate.
This upcoming weekend should now be considered the final and definitive line in the sand for a more lasting agreement between Greece and its international creditors. To date, Euro officials have been most frustrated with the Greek Government’s antics, but no longer.
Germany’s Merkel has ruled out the possibility of debt haircuts, and has pressed Athens for a detailed proposal on fiscal reform. EU’s Juncker has commented that the Grexit scenario has already been prepared in detail, while EU’s President Donald Tusk said the worst outcome could not be excluded. Even ECB’s Draghi made it clear that Sunday would be the “right moment to make decisions” to avoid a Greek banking system meltdown.
It’s Greece’s final warning; they are expected to come to the table with new economic measures to avoid tumbling out of the currency union.
For traders and investors, it will be the third consecutive weekend to experience event risk market pricing. It seems obvious now that traders can expect some significant price gaps again on the Australasian open come Sunday. Some of the price moves may even be more substantial than what we have witnessed over the past two weekends.
Nevertheless, despite the increased appetite for safe haven assets, specifically the yen, market prices have remained relatively fluid and orderly, and that includes euro periphery bond yields, which would suggest that euro policy makers have so far corralled the possibilities of euro contagion occurring.
Currencies Under Three-Prong Attack
Greece is only one of three components that are currently driving capital market asset prices. The other two are Chinese stocks and the timing of the Fed’s first-rate hike.
The rise in volatility for risky assets is having a significant currency impact. For such a long time, USD/JPY had been trading in a relatively tight range (¥122.75-¥123.50). The historical flight to safe haven quality would usually favor investors buying CHF; however, with the SNB being proactive and vocal in discouraging the accumulation of speculative “long” CHF positions, it is aiding JPY the most.
With Chinese equities continuing their plunge (-8.2%), despite more measures to prop up stocks by authorities, investors have been convinced to seek refuge in owning yen across the board. Commodity and interest sensitive currencies like the CAD, AUD and NOK have been hardest hit, pressured by questionable growth prospects from China hurting commodity prices.
The Greek situation and Chinese equity sell-off could slow down expectations that the Fed was preparing for higher interest rates. The market expects some clarity on the situation from the FOMC’s meeting minutes later this afternoon.
No Easy Task for the Fed
The Fed is in a tough position. Yellen has been adamant that rate normalization is data dependent. Despite some U.S. mixed data of late, global hotspots like the Eurozone and China are having a significant impact on the USD, and higher rates will only cause the dollar’s value to rise even further, again causing more problems for U.S exports.
The Fed has to walk a fine line and cannot afford to send any mixed messages. Today’s FOMC minutes could increase investor’s conviction for USD strength versus the beleaguered EUR in particular. Consensus expects a more hawkish tone from policy makers – the event risk is for a neutral bias. If the committee happens to be more optimistic on their economy and favors raising interest rates this year, the EUR’s rally will be capped rather quickly.
Greece has technically been given a five-day deadline to come up with creditor-acceptable proposals, which is currently helping the EUR to recovery from yesterday’s lows (€1.0919). In the overnight session, the single unit has managed to trigger various buy-stop loss orders topside, which has temporarily pushed the pair above the psychological €1.1050 handle.
