Will Greece Ruin Capital Markets Weekend?

  • Major currencies contained for the moment
  • Be prepared for a take-it-or-leave-it deal
  • SNB’s Jordan will intervene or lower rates
  • Liquidity to become more of an issue

The forex market appears totally jaded with what’s going down, or not, with Greece and its creditors. For now, currency price moves are relatively contained, notwithstanding the odd fluctuation from a jibe or two from a couple of central bankers, like Swiss National Bank (SNB)’s President Thomas Jordan. Aside from that, and with the lack of any real fundamental news, both investors and traders are back to news ticker watching while Europe sorts itself out.

Month-end and half-year end is upon us, and investors should be preparing themselves for some hectic prices moves as a number of portfolio managers try to both mitigate and navigate their way through a Greek default price risk move.

Last Monday’s Greek proposal lasted less than two days before their creditors threw it out. It appears that the International Monetary Fund (IMF), European Central Bank, and European Union would prefer to go back to a plan from a couple of weeks ago where an austerity composition relies more on spending cuts rather than tax increases. However, no one seems confident in how Greece collects taxes; hence, this proposal was always going to be a non-starter if tax revenue was to be the foundation of their plan.

A Greek Default Looms

There is not much time for a deal to be finalized, especially with the ‘hard’ date of June 30 penciled in for a Greek-IMF repayment.

If both sides do not find any common ground today, but are at least still talking, then the market will be expecting negotiation to go deep on Friday. If a deal is struck, Greece will have the weekend to commandeer parliament approval, which is easier said than done, while German parliament approval can be completed on Monday. It sounds so easy, but as of now they are worlds apart.

Nonetheless, if there is no deal by June 30 then, according to the IMF, Greece will be technically in default. The process requires IMF chief Christine Lagarde to acknowledge that scenario before actually triggering a plethora of repayment default clauses.

So aside from month-end demands, capital market moves are expected to be held hostage to European-Greek shenanigans over the next few days, unless of course Greece’s creditors present a ‘take-it-or-leave-it’ choice today. This scenario shortens the whole process and may ruin many an individuals’ weekend.

SNB Warns of Overvalued Franc

It’s difficult for many to have respect for the SNB, especially after the underhanded policy move it pulled last January (scrapping the €1.20 currency cap). Its actions will leave a bad taste in investors’ mouths for a very long time. Nevertheless, the market needs to listen to Jordan for directional clues, especially when the Swiss franc remains in such demand mostly from a safe-haven perspective.

It’s no surprise that Jordan sees the CHF as “significantly overvalued” (€1.0484). He cautions that the central bank has no easy fix for the problems that it’s creating for his country. However, the SNB again reiterated that it could still intervene in the forex market, and/or apply more negative interest rates to release some of the external pressures on their currency. Verbal intervention seems to be the first tool of choice to weaken a currency. The Reserve Bank of Australia’s Governor, Glenn Stevens, uses the same technique at every available opportunity.

Despite today’s warning shots from Jordan, he acknowledges that the situation is unlikely to improve anytime soon. It seems that he is putting his economic faith in an improving global economy. Be forewarned: the SNB has set a precedent of not sticking to the script.

Thin Trading Conditions Ahead

For capital markets next week, most things backup rather quickly. U.S. nonfarm payrolls for June will be released a day early on July 2 due to the Independence Day holiday stateside on Friday. The ongoing Greek fiasco, coupled with quarter- and half-year end and a holiday-shorted week, will mean that market liquidity will be expected to be a rather significant issue for investors and traders.

Forex heatmap

Dean Popplewell

Dean Popplewell

Vice-President of Market Analysis at MarketPulse
Dean Popplewell has nearly two decades of experience trading currencies and fixed income instruments. He has a deep understanding of market fundamentals and the impact of global events on capital markets. He is respected among professional traders for his skilled analysis and career history as global head of trading for firms such as Scotia Capital and BMO Nesbitt Burns. Since joining OANDA in 2006, Dean has played an instrumental role in driving awareness of the forex market as an emerging asset class for retail investors, as well as providing expert counsel to a number of internal teams on how to best serve clients and industry stakeholders.
Dean Popplewell