Euro Dollar Rate Forecasts for 2014-2015 - page 17
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The Greek News And EUR/USD Reaction - Nomura
In a note to clients today, Nomura discusses the potential EUR/USD reaction from the Greek news over the weekend.
Starting with a wrap-up of what happened so far:
"A referendum will take place on July 5, in which the Greek people are asked whether they accept the draft agreement presented by the EC, ECB and the IMF on June 25. The government will campaign for a no. The Eurogroup has decided not to prolong the 2nd bailout program after June 30. The ECB has announced that the ELA ceiling will be capped just below EUR89bn. Greek banks will remain closed on Monday."
Implications On EUR/USD trading:
"On net, we think the knee-jerk reaction to the Greek news will be for EURUSD to trade down in the Asia open. But our conviction in this view is lower than for the direction of Eurozone risk assets. We closed at 1.1160 on Friday, and we could test 1.10 in early hours of trading. The important part of the session will only begin when European markets open, however. The key here will be if contagion effects to peripheral markets are significant (leading to a break in bond spreads observed this year), and if equity market weakness generates sufficient hedge adjustment to push EURUSD higher," Nomura argues.
"Our base line is an initial move towards of 1.10. But no major follow though from there, and perhaps a reversal if contagion effects turn out to be manageable without ECB intervention beyond the soft verbal intervention we already received on Sunday. And beyond that, all will depend on how opinion polls stack up and whether we get the Yes or the No vote next weekend," Nomura projects.
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They knew it : it is not just SNB. It is ECB too. ECB does not want a weak Euro any more - ever since Obama told that strong dollar is not too good. Markets are dead. It is only politics - nothing to do with free markets
Assessing Contagion From Greece – Deutsche Bank
As only several hours are left for the deadline Greece has to pay the IMF, tensions are rising in European capitals.
If Greece defaults and exits, what are the implications for the rest of the euro-zone? The team at Deutsche Bank explains:
Here is their view :
In a note to clients today, Deutsche Bank assess the risk of Greek contagion to other euro area members from the perspective of their macroeconomic position, the euro area’s crisis response and national politics.
“Macroeconomic fundamentals suggest less of a basis for contagion compared to the crisis in 2010-2012. Private sector direct exposure to Greece is much smaller. The euro-area in general, and the other peripherals, are in a stronger position. The economy is in a recovery phase, albeit modest, and the current accounts of peripheral countries are in positive territory. Unlike in Greece and unlike 2012, private capital in the other peripherals has been stable so far this year. There has been some progress on the structural reform side too,” DB clarifies.
“Euro-area crisis management tools are much stronger than in the past. The ECB will not tolerate a tightening of financial conditions and has proven its ability to intervene in government bond markets with QE. The ESM is fully operational. Ireland and Portugal’s “clean exits” from their bailout programme demonstrates Europe’s capacity for success,” DB adds.
“Support for populist parties – buoyed by high unemployment, reform fatigue and a slow recovery – has increased throughout Europe. Within the next year there will be elections in Portugal, Spain and Ireland. The chance of seeing a parallel to the Syriza government emerge elsewhere is relatively low, in our view. Italy may have the highest proportion of euroskeptic parties but focus will likely be on Spain and the risk of Podemos being part of a government coalition,” DB argues.
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Opinion: ‘Spectacular rallies’ await investors who buy Greece now
After months of complacency, a little fear has crept back into the markets. Fear is good because one of the best ways to make money is to buy fear, says Lawrence McDonald, head of U.S. macro strategy at Societe Generale.
A good way to buy fear is to go long on Greek stocks via the exchange traded fund Global X FTSE Greece 20 ETF GREK, +1.99% “Over the next week, there is a good chance we may see spectacular rallies, because this is by no means over,” says McDonald.
McDonald sees Greek shares as more of a trading opportunity but, ultimately, he thinks Greece will stay in the eurozone, which suggests the Global X FTSE Greece 20 ETF might be good for the long haul, too. “We’re optimistic that a resolution will be reached,” he says.
Even if we get a Grexit, several positives in that scenario will help Greek companies in the long run. (More on that below.)
If Greek stocks seem too risky, here is a safer way to go: Swap U.S. stocks for the cheaper shares of European companies getting hit by Europe’s latest Hellenic headache. European economies have been improving, maintains James Paulsen, chief strategist at Wells Capital Management. And Europe is still in a phase of monetary easing compared to the U.S., which is headed into a tightening phase, he says.
An ETF to consider for the job here is Vanguard FTSE Europe ETF VGK, -0.59% down 7% from May peaks. It now offers a 3.3% yield. If you prefer individual stocks, consider quality banks and insurers getting hurt like ING Groep ING, +2.28% Credit Agricole CRARY, +0.13% Societe Generale SCGLY, +0.32% and Intesa Sanpaolo ISNPY, +0.05% say analysts at Credit Suisse, which has an “outperform” rating on all of those companies.
Of course, to buy fear, you have to have some rationale for thinking the fear is overdone. Here are my five reasons why the current fears about Greece are exaggerated.
1. Greece will not be another “Lehman.”
One of the reasons for the Greece-related selling on June 29 was that New York Federal Reserve Bank President William Dudley mentioned the dreaded “L” word while cautioning investors about a potential Grexit contagion, says Ed Yardeni of Yardeni Research. Said Dudley in a media report: “People did not anticipate that the Lehman failure was going to affect the economy and financial markets to the degree that it did.”
Ouch. No one wants to hear Lehman brought up at a time like this.
And they shouldn’t have to, since most of Greece’s debt has been moved out of private hands and on to the books of European governments. European bank exposure is minimal, says Credit Suisse analyst Carla Antunes-Silva. Yardeni says: “I seriously doubt that the contagion potential of a Grexit is comparable to the financial meltdown triggered by the Lehman debacle.”
2. Greece’s missed 1.5 billion euro payment to the International Monetary Fund this week probably won’t lead to a default disaster.
read more
Then why all the fuss?
Greece Risks Contained But Euro Still To Go Lower – BTMU
Greek talks are now officially on hold until the Greferendum on Sunday. The Eurogroup shut the door after the defiant speech from Tsipras.
In any case, the team at BTMU sees the euro facing downwards pressure:
Here is their view :
The euro remains very resilient to the marked upturn in risk related to ‘Grexit’ toward month-end after a referendum was announced and capital controls were introduced in Greece until 7th July, notes Bank of Tokyo-Mitsubishi (BTMU).
“Under ECB QE, the euro has been undermined by speculative selling as investors use the euro as a funding currency and by capital flight with a large swing in net fixed income flows. An event risk like ‘Grexit’ creates uncertainty around this trade and provides support as it is reversed,” BTMU adds.
“We have laid out the possible scenarios in regard to Greece and under our assumption, we expect appetite for the ‘ECB QE trade’ to return and for investors’ use of the euro as a funding currency to be revived once the intense uncertainty fades. The current crisis will no doubt undermine business confidence in the euro-zone and hence will likely reinforce the ECB’s determination in implementing the QE program in full,” BTMU argues.
“In our assumed scenario we would then expect that the relative macro divergence returns as the focus following a Greece resolution and EUR/USD then weakens beyond parity by year-end. Our Q2-2016 EUR/USD forecast 1.0000.” BTMU projects.
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Keeping A Wider Range For The Week Ahead – BTMU
The never-ending Greek crisis is set to reach another climax on Sunday with the Greferendum. Recent polls show a tight race and the uncertainty implies high volatility at the Asian open.
What levels should we look at any scenario? The team at BTMU explains:
Here is their view :
Bank of Tokyo Mitsubishi (BTMU) is maintaining a wider than usual EUR/USD trading band (1.08-1.14) for the week ahead given the crucial importance of the referendum in Greece on Sunday.
Going into this weekend’s Greek referendum, BTMU is assuming that the Greek public will vote “Yes” given their desire to remain within the euro-zone.
“However, if there is a “No” vote it will make it even more difficult for the creditors to reach an agreement with the current Greek government. Without an agreement the ECB will remain under pressure to pull emergency financing from the Greek banks moving Greece closer towards an exit from the euro-zone placing more downward pressure on the euro,” BTMU argues.
“Alternatively if the “Yes” vote prevails, the current Greek government would likely be replaced by a national unity government tasked with securing an agreement with the creditors. The euro may stage a limited relief rally although a return to relative fundamental drivers would likely see the euro soon come back under downward pressure,” BTMU adds.
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Here is BNP's 'best play' for the EUR to trade the Greek referendum
BNP Paribas assess the FX response to this weekend's Greek referendum, outlining the potential EUR response to a Yes/No vote and along with the best EUR trade to position for such an event.
Good news for Greece is bad news for the EUR.
"We continue to believe that good news on Greece represents bad news for the EUR. The ECB's quantitative easing programme (QE) is the key factor driving down the EUR, as the single currency is used as the key funding currency for FX carry trades. EURUSD is overvalued versus 2y rate spreads. Disappointing headlines on Greece produce a risk-off approach in markets that results in the unwinding of carry trades and buying back of the EUR. We believe this logic will remain in place around Sunday's referendum," BNPP argues.
EUR response to a Yes/No note.
"A 'yes' outcome should produce a relief rally in markets and encourage investors to again add to EUR-funded carry trades. This will drive the EUR lower. In contrast, a 'no' outcome may produce new risk reduction and a further unwinding of EUR shorts," BNPP projects.
EUR positioning into the referendum.
"Our BNP Paribas Indicator reports short EUR exposure at -14 (on our scale of -50 to 50), which is a moderate short but well below the trough of -35 in January. This logic on FX is supported by the relationship with peripheral spreads during the latest round of Greek negotiations since February. The FX interpretation is also consistent with our anticipated response by the eurozone peripheral bond market, including an overshoot in the immediate aftermath of the referendum," BNPP notes.
How to play it? Sell EUR/JPY.
"A short EURJPY position also includes an element of a tail-risk hedge. Like EURUSD, EURJPY appears significantly overvalued according to 2y real rate spreads. A surprise 'no' vote would likely cause a sharp risk-off event similar to that of Monday morning (29 June). In this situation the EUR would drop sharply and the JPY would benefit as a safe haven, especially as the market is not currently running a net long JPY exposure," BNPP advises.
Greek referendum cheatsheet from Credit Suisse
Credit Suisse provides a short cheat-sheet for FX traders to position for the Yes/No vote
1- "Victory of the "No" camp, would immediately cast markets in uncharted territory. The vote alone might not necessarily trigger a systemic reaction, but we would expect the increase in uncertainty to weigh on EUR and on risk assets, with surging demand for "safe haven" currencies such USD, CHF, JPY and GBP," CS projects.
2- In the event of a "Yes" vote, we think the likely knee-jerk move higher in EURUSD would likely be short-lived. The victory of the "Yes" camp, would likely have a more limited impact on monetary policy stances outside of the Euro area, in our view. In other words, the removal of the immediate risk of a potentially systemic event would allow markets to refocus on the policy divergence story," CS adds.
3- "Finally, while a "yes" victory would reduce the immediate risk of a Greek exit from the euroarea, many aspects of the post-vote outlook would remain very uncertain. As an example, a minimally reworked extension of the now expired Greek bailout terms could be viewed by markets as insufficient to prevent renewed flaring up of peripheral risk later this year," CS argues.
4- "We remain firmly of the view that this story remains EUR bearish," CS concludes.
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Believing the an CNB offspring is the last thing recommended for a trader