‘Grexit’ Talk Increasing Pressure On ECB

Greek politicians’ failure to form a new coalition government over the weekend has increased chatter about the prospect of Greece ditching the euro. Senior politicians and central bankers are now openly discussing how a Greek exit – or “Grexit” in market jargon – could be managed. German Bund yields have dropped to an all-time low of 1.45% in trading this morning as hedge funds dash for safe assets.

The EURUSD crashed through $1.29 earlier and looks likely to fall below $1.285. The Dollar Index (USDX) is up 0.11% at 80.50. Precious metals have continued selling off, with gold now on course to test major support around $1,550 and silver down by over 1% so far today, at below $28.50. Platinum and palladium are also down, with the latter having a particularly tough time since the start of May, and could soon test last year’s price low at around $535 per ounce.

Given the toxic combination of political uncertainty and stock market sell-offs, pressure on the European Central Bank to provide more liquidity is growing – despite the already drastic increase in the ECB’s balance sheet seen over the last year. This now stands at over 3 trillion euros (close to $4 trillion), which is more than a third bigger than the US Federal Reserve’s $2.9 trillion balance sheet.

But given the growing people’s revolt against “austerity” across the eurozone – including in Germany, where on Sunday Chancellor Merkel’s Christian Democrats suffered a big defeat to the Social Democrats in North-Rhine Westphalia, the country’s most populous state – further ECB action looks likely. As Kiron Sarkar comments, German finance minister Wolfgang Schaeuble is now talking about an “acceptable” rate of eurozone inflation of between 2-3%, while the head of the Bundesbank’s economics department stated last week that Germany would have to accept higher inflation as the price of keeping the eurozone intact.

In other words, it looks like efforts to weaken the euro are about to be cranked up a notch.