EUR in No Man’s Land: Jaded Traders Headline Watching

Greece has followed through on demands by European Union officials and delivered new proposals ahead of today’s supposed make or break euro emergency summit. The market is getting mixed messages on whether there will be a Greek solution found later this afternoon.

European Commission President Jean-Claude Juncker says he does not know if there will be one, while E.U. Economic Commissioner Pierre Moscovici said he was “convinced” that eurozone leaders holding an emergency meeting in Brussels would find a way out of the Greek crisis. The talks will start in a couple of hours and are expected to go well into the night. It does seem that the new proposals may be well received and there could be an eleventh hour deal in the works. However, asset prices will obviously be susceptible to Greek headlines. Investors should be preparing for pingpong price action.

Earlier this morning the European Central Bank (ECB) supposedly approved additional liquidity to keep Greece’s financial wheels greased. It is the third time that the ECB has upped the Bank of Greece’s emergency liquidity assistance (ELA) over the past six days. This had been necessary as today’s Greek banking sector pre-order withdrawals of cash was said to be over +€1.0 billion. Last week over +€4.2 billion was drained from deposit accounts.

EUR Treads Water

The single unit has now returned to trading in neutral territory, the mid-point from last Friday’s and the overnight range (€1.1340-50), and after having filled in the gap from the Asian session (€1.1404 high overnight).

For the majority of traders and speculators, the risk-reward still favors buying EURs on dips. However, no matter what the spin doctors are saying ahead of today’s summit, the Greek prime minister is still looking for an agreement without value-added tax (VAT) hikes. The unpredictability will lead to more anxious moments for investors and traders who have been forced to watch headlines. Any mention of a Grexit will have traders nervously scuttling for the exits.

On the flipside, Greek investors certainly seem optimistic over the ongoing negotiations between their Prime Minister Alexis Tsipras and the country’s creditors. In the bond market, Greek-German spreads have tightened significantly this morning. Greek 10-year debt (+11.30%) is about -145 basis points tighter to the German 10-year Bund (+0.81%) as the market heads stateside. However, perhaps more significant is that two-year Greek paper (+25.23%) is a stunning -370 basis points to German Schatz (-0.184%: two-year debt issued by the German federal government). Obviously, poor liquidity is contributing to some of the price action along with the uncertainty over what the Greek proposals actually are.

Supposedly, the reforms are to gradually raise retirement age to 67. Greek officials have offered to have +23% as main VAT, +13% for energy and basic food, and +6% for medicine and books. Do not be surprised if eurozone officials form a common stance as early as this evening. If there is no progress today, the market should be interpreting this as a deal to be confirmed over the next few days. Any progress will have Greece pushing away from a potential default scenario.

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