Pricing EUR’s QE, Not Future Greek Talks Just Yet

  • Syriza win ‘big’
  • Form coalition with center-right fringe party
  • EUR touched sub €1.11 new-lows
  • Market pricing QE vs. anti-austerity talks

Greece’s radical left-wing Syriza party is set to become the first anti-austerity party to lead a eurozone nation. Most of the market had expected Syriza leader Alexis Tsipras and his party would be victorious, but it’s the margin of the win that’s considered to be most significant. The overwhelming 10-pt. spread (36-38% versus 26-28% for ruling the New Democracy party) is rather expressive of the austerity exhaustion felt throughout the eurozone periphery. The rise of the Greek anti-bailout left is now expected to provide further motivational support throughout Europe for like-minded individuals.

Earlier this morning, Syriza formed a new coalition government with the center-right Independent Greeks party that will immediately look into of reversing the current austerity policies, and renegotiate with the Troika – the European Union, European Central Bank (ECB), and the International Monetary Fund (IMF) — to reduce Greece’s debt burden. New Prime Minister Tsipras, repeating his winning mandate, said the election marks the end of the bailout agreement for Greece and cancels the program of austerity. He also pledged to cooperate with partners to achieve a “mutual solution” rather than a “destructive collision.” Not untypical, Germany’s Bundesbank chief Jens Weidmann pre-empted any re-negotiation plans, stating that “Greece will remain dependent on support and it’s also clear that this aid will be provided only when it is an aid program.” Greece must repay about €4 billion to the IMF in the next couple of months.

The election result is likely to dominate today’s Eurogroup meeting of 19 eurozone finance ministers in Brussels. All 28 E.U. finance ministers will participate in more talks on Tuesday.

The EUR’s Flight of Fancy

The market’s initial reaction to the Greek election’s outcome was to further penalize the EUR, pushing it briefly to a new 11-year low (€1.098) in the Asian session. However, the EUR weakness has been short-lived, with the single unit riding higher outright (€1.1246) and against the yen during European trading (€133.00). The market seems a tad more confident that last week’s quantitative easing (QE) support by the ECB leaves the markets less vulnerable to any eurozone break-up fears. Many are viewing ECB President Mario Draghi’s backstops as having “effectively firewalled Greek developments and should limit contagion.” In translation, investors will have to gauge the EUR’s natural price weakness that is supported by QE and not by eurozone periphery fears.

Many will interpret the larger-than-expected victory by Syriza will leave the EUR vulnerable for further short-selling in the short term. The fact that the single unit is down 14-big figures since December with little or no retracement, consolidation, and some profit-taking, could be a risk factor to some of the weaker EUR short positions. The Greek results gives Tsipras a strong mandate to push through major national changes, however, the external negotiations will be more of a market risk factor, and are sure to heighten volatility over the coming months. But, that is a problem for tomorrow. For now, the market should be pricing fair value EUR QE versus an expected Greek result with a wider margin win.

Shock but No Awe

The Federal Reserve’s progress away from easy money policies is not the only supporter for current market volatility. The fact that other central banks cannot follow in the Fed’s footsteps is certainly propping up current market unpredictability. As the Fed reduces its economic intervention, the ECB and Bank of Japan (BoJ) are increasing theirs. The People’s Bank of China is using different programs to support China’s economy, where growth levels are at 24-year lows. Rate divergence is leading to greater volatility and market opportunity.

Three central banks that officially met last week all took action. The BoJ extended its bond-buying program timelines and acknowledged that the +2% inflation target goal would not be met by the second quarter of this year. Governor Stephen Poloz at the Bank of Canada lowered his key interest rate by -25bps to +0.75%, acknowledging the impact of sliding oil prices on the Canadian economy. And finally, the ECB added a QE program to fend off deflation and jab the eurozone’s economy into growth. Other surprise actions have come courtesy of Denmark’s central bank that twice slashed its overnight rates due to safe-haven demand (the DKK is a substitute for some CHF players).

Fed Expected to Hold the Line

From an economic perspective, last week was always going to be a difficult one for event-risk action. Still, with rate divergence dominating currency direction, any time the Fed is on the agenda the markets take note. This week’s Fed pow-wow may not appear to promise the same amount of market volatility but one can never be sure. The Fed meets Wednesday but no policy change is expected. The Reserve Bank of New Zealand also meets on Wednesday.

Other headlines that are expected to make a difference include the U.S. and U.K. reporting their respective first estimates of fourth-quarter growth. Meanwhile, Japan will post its usual end-of-month deluge of economic reports including unemployment, industrial production, consumer prices, household spending and retail sales.

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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