- Greek drama continues to unfold
- U.S. front-end yields support dollar
- ECB’s policies squash periphery fears
- Fed in a position to change rhetoric
Various asset classes are treading water this morning as investors await the outcomes of a couple of crunch meetings on the future of financial aid to Greece. The Greek drama continues to unfold as the Eurogroup holds an extraordinary meeting today and again on February 16. The uncertainty of the outcome will mean ongoing volatility in various asset classes. Hopes for a quick deal do not look forthcoming, nevertheless there could still be room for a deal before Monday’s pivotal meet up — that is if Germany is an a forgiving mood.
Greek Showdown Looms
The press will have you believe that the hardline stance from Germany versus Greece’s afflicted posture is coming down to the wire. Greece wants to scrap about 30% of the current bailout conditions and replace it with measures approved by the Organization for Economic Cooperation and Development. The current bailout will expire in two weeks. Global investors are obviously concerned that a head-to-head between Greek Prime Minister Alexis Tsipras’s government and the country’s international creditors could instigate Greece exiting the eurozone, and thereby trigger another round of financial instability in Europe. The popular line in the news media is that Greece’s stance in the talks is unworkable and that a European disaster is imminent. The reality is that capital markets are pricing in some kind of stopgap funding deal for Greece. There is too much to lose for everyone, including Germany. Any stopgap measure will allow European Central Bank (ECB) funding for Greek financial institutions to continue, and importantly, to provide more time for talks and cooler heads to prevail.
Tactical versus Practical
Investors should be expecting the forex landscape to be more about tactical positioning rather than outright data-driven moves as European political tension currently trumps imminent economic releases. Fundamental data remains in short supply, and a big letdown from last week’s events. The reality is that today’s Eurogroup meeting is the first step in a Greek debt negotiation process with no obvious near-term deadlines required. The market is focusing on the end of this month, as the deadline is technically irrelevant especially now that the ECB has pulled its waiver on Greek collateral. In truth, Greece has an obligation to fulfill a couple of International Monetary Fund repayments next month, but the significant repayments that Athens ought to meet do not occur until the middle of July. Investors and capital markets most likely will be held hostage by the Greek tragedy for some time yet.
Eurozone Contagion Squashed
When discussing Europe, contagion is a natural fear among the peripheries. Despite eurozone periphery spreads having a softer tone of late (Portugal and Spain), investors’ fear of contagion should be rather limited, mostly on the back of the ECB’s policy efforts over the last couple of years. Investors’ appetite for yield, any yield, in the current deflationary threatened environment should be providing technical support for periphery spreads, and having the ECB as a backstop ought to make it easier for investors to make that decision.
There is very little natural movement in the major currency pairs. U.S. short-term yields trading atop one-month highs after last week’s nonfarm payrolls report continue to support the USD. Yesterday’s JOLTS (Job Openings and Labor Turnover Survey) data in the U.S. came in at a 14-year high, solidifying the buoyant jobs scene stateside. The market should be anticipating a change to the Federal Reserve’s rhetoric. The possibility of “patient” actually disappearing from next month’s Fed statement is now a reality. Investors need to focus on front-end yields to gauge support for the dollar. If they remain close to current levels then yield differentials will obviously favor the USD versus JPY, EUR, and CHF. However, with heightened event and political risk abound, investors should not be willing to force their positions.
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