When Saturday Comes
It’s not quite time to rename these updates the “World First Greek Update” but we are getting close. Yesterday’s Eurogroup meeting once again fizzled out without agreement save to stick a pin in it until Saturday.
Comments from European leaders have remained positive, as you would expect. Merkel has said that Saturday will be “decisive” whilst France’s President Hollande said that an accord was “in sight”. Deal fatigue is only increasing as the June 30th deadline approaches. Despite that, currency market volatility has been falling for the past week. Simply put, traders have seen all of this before and will only start to make their moves as we get closer to that June 30th D-Day.
That is not to say that, without a deal, we will wake up on July 1st with a great market collapse. Even if the payment to the IMF due at the end of the month is missed, the IMF will not mark Greece in a default until the Executive Board meets a month later. Likewise, we cannot see the ECB cutting its ELA assistance – liquidity to the Greek banking system – if progress is being made.
Worst case under-realised by markets
I must also warn that I believe that markets are significantly under-pricing the risk of a Greek collapse. Quantitative easing has kept markets in a protective cocoon and has led them to under-price events. The US’s debt ceiling negotiations in 2011, QE from the Federal Reserve, the Swiss National Bank’s floor giving way are all examples of this. What makes everyone believe that the termination of a country’s membership of a currency union, the collapse of its banking system and the imposition of capital controls is ‘business as usual’?
In any case, the euro is looking slightly more alive to the prospect this morning and is lower across the board. Whether it will continue is dependent on the Brussels-based fun and games that we have tomorrow to look forward to.
Kiwi dollar continues to sink
Elsewhere, almost as far as you can get from Greece, the Reserve Bank of New Zealand has maintained its belief that the NZD is overly strong and sits at an unjustifiable level. In a publication documenting the risks to the New Zealand economy, it focused on the strength of the New Zealand dollar as well as the risks of declines in the income made on dairy exports and the continued pressure on Chinese and Australian economies. NZD has fallen to fresh five year lows this morning.
The day ahead
With the falling volatility and the focus shifting to tomorrow’s Eurogroup meeting, we have to see today’s markets as sideways once again. That being said, I would not be surprised if we saw a sell-off in riskier assets towards the end of the day as investors cover positions over the weekend.
