- Greece given a five-day deadline
- Deliver or bust for Greek banks
- Euro yields suggest contagion corralled for now
- Investors to focus on FOMC minutes
For most traders and investors, this week has been difficult to keep up with ‘who is who,’ and ‘who said what’ about Greece from a eurozone, Eurogroup, or Euro finance minister’s perspective.
Opinions, comments, and Greek fiscal solutions have been bantered about confusing even the most agile of traders. However, the message that followed yesterday’s meeting of European officials was simple and uncompromising: July 12 will decide Greece’s fate.
This upcoming weekend should now be considered the final and definitive line in the sand for a more lasting agreement between Greece and its international creditors. To date, Euro officials have been frustrated by the Greek government’s antics but no longer.
German Chancellor Angela Merkel has ruled out the possibility of debt haircuts, and has pressed Athens for a detailed proposal on fiscal reform. European Commission President Jean-Claude Juncker said the eurozone is prepared for a Grexit, while European Union President Donald Tusk said the worst outcome could not be excluded. Even European Central Bank President Mario Draghi has made it clear Sunday would be the “right moment to make decisions” to avoid the Greek banking system meltdown.
It’s Greece’s final warning. Prime Minister Alexis Tsipras’s government is expected to come to the table with new economic measures to avoid tumbling out of the currency union.
For traders and investors, it will be the third consecutive weekend to experience event-risk market pricing. It seems obvious now that traders can expect some significant price gaps again on the Australasian open come Sunday. Some of the price moves may even be more substantial than what we have witnessed over the past two weekends.
Nevertheless, despite the increased appetite for safe-haven assets, specifically the yen, market prices remain relatively fluid and orderly. That includes Euro periphery bond yields, suggesting that European policymakers have managed to corral the possibilities of a ripple effect impacting the eurozone should debt-laden Greece be shown the door.
Currencies Under Siege
Greece is only one of three components that are currently driving capital market asset prices. The other two are Chinese stocks and the timing of the Federal Reserve’s first-rate hike.
The rise in volatility for risky assets is having a significant currency impact. Previously, USD/JPY had been trading in a relatively tight range (¥122.75-¥123.50), but risk aversion has changed the market dynamics. The historical flight to safe-haven quality would usually favor investors buying CHF. However, the Swiss National Bank is proactively discouraging speculative “long” CHF positions, and that is aiding JPY (¥121.42) the most.
With Chinese equities continuing their plunge (-5.9%) despite more measures to prop up stocks by authorities, investors are seeking refuge in owning yen across the board. Commodity- and interest sensitive-currencies like the CAD, AUD, and NOK have been hardest hit due to China’s questionable growth prospects.
The Greek situation and Chinese equity sell-off could slow down expectations that the Fed was preparing for higher interest rates. The market expects some clarity on the situation from the Federal Open Market Committee’s (FOMC) meeting minutes when they are released later this afternoon.
No Easy Task for the Fed
The Fed is in a tough position. Chair Janet Yellen has been adamant that rate normalization is data dependent. Despite some U.S. mixed data of late, global hotspots like the eurozone and China are having a significant impact on the USD, and higher rates will only cause the dollar’s value to rise even further causing more problems for American exports, growth and inflation expectations.
The Fed has to walk a fine line and cannot afford to send any mixed messages. Today’s FOMC minutes could increase investors’ convictions for USD strength versus the beleaguered EUR. Consensus expects a more hawkish tone from policymakers – the event risk is for a neutral bias. If the committee happens to be more optimistic on the economy and favors raising interest rates this year, the EUR rally will be capped rather quickly.
Now that Greece has technically been given a five-day deadline to come up with creditor-acceptable proposals, the EUR is recovering from yesterday’s lows (€1.0919). In the overnight session, the single unit has managed to trigger various buy stop-loss orders topside, temporarily pushing the pair above the psychological €1.1050 handle. Problems in Europe and China could be putting the Fed on the back foot, perhaps its more prudent for Ms. Yellen and company to wait, especially if there is a dovish ECB response to counter recent Greek events.