EUR Not Bothered by Greek Outcome

It’s a difficult week to get excited about in capital markets. Most of the necessary positional business that had to be done will have been concluded well ahead of the New Year due to massive liquidity limitations. Investors should not be surprised to see unexpected event risk, and weak speculative positions, guiding this week’s currency moves as we count down remaining few days of the calendar year.

Greece: Third Time’s a Charm?

In the eurozone, the markets have been bracing themselves for this morning’s third round of presidential polls in Greece after two failed votes already this month. With none of the presidential candidates capturing the votes needed to become president, Greek Prime Minister Antonis Samaras called for parliamentary elections to be held on January 25. The political quagmire in Athens now casts much doubt over Greece’s international bailout and it will surely leave its European Union partners facing weeks of financial turbulence.

So far, it seems that the current political uncertainty has been well contained and is affecting mostly Greek assets. Shorter-dated Greek paper is suffering the most, with five-year bonds backing up +50bp to +9.43%. Obviously not helping the situation is the lack of liquidity within the Christmas and New Year’s holidays. Other eurozone peripheral bond markets are being helped by expectations the European Central Bank (ECB) will launch a quantitative easing (QE) program in the first quarter of 2015. New Greek elections would require periphery products to be re-priced with wider spreads for event risk purposes as it brings back the spectra of a “Grexit” from the EUR.

Currently, it’s the lack of market interest that is providing a no-show by fixed-income traders. Nervous investors continue to acquire German Bunds, mostly on the back of Greek opinion polls favoring the radical leftist Syriza party (strong opponents of the E.U./ECB/troika agreement). Whatever the outcome, a ‘new’ Greek government would have to abide by previous E.U. commitments to ensure continued external support.

The 18-member single currency has again eased below the psychological €1.22 handle on the news out of Greece. The EUR’s pre-election vote range was relatively tight (€1.2173-1.2222). Things now become rather interesting for the eurozone in the latter half of January. The market is currently expecting an ECB QE announcement on January 22, and in hot pursuit a Greek election within days thereafter. The EUR bear will feel rather comfortable as we head into the New Year. They remain confidently fixated on their €1.20 short-term target. A break above the €1.2340 resistance would alleviate some of the immediate EUR pressure.

Abe Delivers no Surprises

As correctly speculated by the market last week, Prime Minister Shinzo Abe’s Japanese government has confirmed it would offer a fiscal stimulus package in the amount of $29B (¥3.5T). The bulk of the package is comprised of subsidies and merchandise vouchers for individual households. The government’s obvious objective is to help stimulate consumption. The packaged announced is expected to provide more relief and prevention measures targeted at the great earthquake-hit regions, with the government estimating the impact of stimulus at +0.7% of added gross domestic product growth. Even with all the subsidies, there is regional speculation that Abe is still expected to lower the corporate tax rates by -3.3% over the next two years.

Like most of the other major currency pairs, USD/JPY (¥120.47) price action seems to have taken a necessary breather. For the yen bears, the overall scope is for dollar gains back toward ¥121.86, this year’s dollar-high print earlier in the month. The yen bear does not believe that they have to be aggressive in their actions. They currently remain comfortable buying USD on dips and are presently looking to add to their short yen positions just below ¥119, this month’s low, and where there is a plethora of USD bids located.

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