The USD roller coaster ride continues. Despite all the bad press over the past weekend that Greece had missed/ignored the €300 repayment due to the IMF on Friday, the EUR (USD) appears to have found a second wind. The move higher in the EUR yesterday was the result of strong German data with exports up 1.90%, imports down 1.3% and Industrial Production up 0.90%. While these numbers are indeed impressive, the US employment numbers on Friday were equally impressive growing at +280k. As we have noted previously until we have a more definitive idea of when US rates are going to rise (Sept is the call), the currency is likely to remain range bound 1.09/1.1350 as the market attempts to build medium term positions. If one looks at the FX Options market for direction you can see that Option traders are still VERY concerned and have thus maintained EURUSD vol at the recent highs. 1m vol stands at 13.60/13.75, 3m 11.70/12.00 and 1y 10.45/10.65 – in contrast GBPUSD 1m stands at 8.65/9.15, 3m at 8.25/8.65 and 1y at 8.30/8.65. I think under the circumstances I should add USDJPY given that the JPY has fallen to a 12 year low, with 1m vol at 8.80/9.00, 3m at 8.60/9.00 and 1y at 9.65/9.80. What I am trying to illustrate is the GBP is sitting above the crucial psychological 1.50 barrier as is the EURUSD 1.100 while the JPY is trading above 124 and yet the JPY and GBP vol remain “depressed”. On the flip side EURUSD vol is trading at a 5% premium over the others which just goes to show how the market is preparing to position themselves for (1) GREXIT and (2) the USD rally post rate hikes. No doubt the inability to strike an agreement over Greece has been the main catalyst driving EURUSD vol higher and until such time we have a definitive result you can expect vols to remain bid.
The Greece saga will simply not go away. In a way it is helping the markets remain volatile which is what all FX traders like. Having said that the reports over the weekend continue to keep traders on the defensive as some members of Syriza are now openly calling for a default and GREXIT. The majority (80%) of Greeks want to stay in the EU so the GREXIT members are in the minority. It really does defy logic given the complexities and financial Armageddon that ensues a GREXIT. Meanwhile, the economic situation continues to deteriorate in Greece, adding pressure on the general government budget. According to the numbers released by the Ministry of Finance last Friday, the state revenue shortfall grew €1bn in May to reach a total of €2bn since the beginning of the year, and forced the government to increase arrears of payment. Without fresh money from its creditors shortly, Greece may be unable to pay €1.6bn to the IMF at the end of June. With the increasing pressure to GREXIT the Greek banks have continued to see a run on their cash adding more pressure to an already unstable situation. The banks are increasingly relying on Emergency Liquidity Assistance from the Bank of Greece. However if the IMF stop the funding of the ELA this could see the Bank of Greece imposing restrictions on the capital that people can withdraw. With circa €1.6bn due at the end of June and €3.4bn due on the 20 July the Greeks are (secretly) hoping for a deal so that the remaining IMF’s €6.5bn in funding can be released. The strong rhetoric from the PM over the weekend does not help matters. Perhaps the Greek people should realise before it is too late that their choice of Syriza was in hindsight a bad vote.
Call me a conspiracy theorist, but on the face of it after such strong words from Tsipras over the weekend you would have expected the EUR to get mauled at the open. Yet the opposite happened and the German data numbers were “blamed” for the rise in the EUR. My point is I wonder HAS A DEAL BEEN STRUCK!!! Tsipras openly attacks Troika misses a repayment and the EUR APPRECIATES. I smell something brewing in the kitchen and I wonder if that is the smell of a successful resolution (for now) in this long running Greek saga.
As for the GBP – My gut still tells we are heading back down to 1.50 over the coming weeks. Let’s see how right my gut turns out to be.
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