20150616 – DAILY FX MACRO

Good morning

High Low High Low
EUR/USD 1.1330 1.1259 USD/ZAR 12.4800 12.3900
GBP/USD 1.5615 1.5586 GBP/ZAR 19.46 19.32
EUR/GBP 0.7246 0.7218 USD/RUB 55.91 53.60
USD/JPY 123.81 123.30 USD/ILS 3.8518 3.8182
GBP/CHF 1.4536 1.4492 S&P 500 2,085 2,076
GBP/AUD 2.0160 2.0050 Oil (Brent) 64.35 63.75

Ask any trader about what they believe moves markets and the first thing they will tell you is any kind of BAD news will be viewed as negative with respect to the currency in that country. So after news broke over the weekend that the IMF had walked out of a meeting with Greece citing a breakdown in negotiations one would have immediately thought when the markets opened on Monday the EUR would get crushed (don’t forget Chancellor Merkel commenting on Friday that the EUR was too strong). Guess what – that DID NOT HAPPEN. The EUR has rallied climbing through the 1.13 barrier and trading strongly in the face of a Greece defaulting and exiting the EU. I have been asked if I can try explain this phenomenon. The simple answer is I cannot. The only 3 reasonable options for this can be (1) more buyers than sellers, (2) the FOMC meeting tomorrow coupled with disappointing US data yesterday (Industrial Production), and (3) Collusion and “manipulation” by the authorities to keep the EUR perked above 1.10 knowing that if they were not supporting the EUR at this time it would have collapsed towards PARITY. Make no mistake that is still going to happen only the CB’s want to make sure they are ready for that eventuality. Intervention by the CB is common in the FX markets though never told (don’t confuse this type of intervention to the one where a CB intervenes to protect their currency from speculators).

Greece is all over the news. Bloomberg and the Financial Times paper are now discussing the possibility of a Greek default without exit. As we have discussed previously if no agreement is reached by the end of June capital controls would be required as the ECB would have to increase the “haircut” on Greek bonds and assets and more importantly freeze the ELA (Emergency lending) to the Greek CB who in turn provide liquidity to the local banks. The fallout from this is going to be HUGE with a capital H. Default on Greek bonds held by the ECB (€3.4bn 20 July) would lead to cross defaults not to mention the bonds held by foreign banks, hedge funds and other investors. Like in Argentina they would lose the lot. There is a great deal riding on this and unless a deal is reached the global financial system could be heading into unchartered waters and potential financial chaos. Banking stocks were roasted on the spit yesterday as a result. One can argue that the EUR trading where it is could mean there is actually some kind of deal though not announced or agreed to in totality. There are so many if’s and but’s. What we do know is the Greek PM Tsipras is playing a very dangerous game that could see his country go down the tubes. The Greek people were quick to vote them into power in January and it is those people that are now suffering. Should the default happen the Greek CB will be left penniless and people will simply not get paid. This could lead to an early election and bring back the opposition party who have openly said they will have negotiated differently had they been in power. This scenario will see Greek banks freeze bank withdrawals and transfers abroad and bring the Greek economy to a halt. Syriza have played hard ball and are now counting the cost. The bottom line is the Greek government need to reform labour laws, pensions and taxes (or should I say tax avoidance).  Unfortunately the latest news from Tsipras was Syriza would not give in to demands for pension cuts. Perhaps someone should tell Mr Tsipras those same pensions will be worth nothing if there is no money in the coffers.

And as I write this the EUR continues to climb as if everything is calm and an agreement has been reached – PERHAPS THIS IS EXACTLY WHAT HAS HAPPENED and we just have not heard yet.

Not to be left on the sidelines, the GBP has rallied over 1.56 handle in line with the EUR rally (EURGBP slightly better bid). I can just imagine GBP FX spot traders sitting at their desks right now asking themselves what and who is driving the EUR and GBP to these elevated levels. I am certain the truth will come out soon enough and we will find out just how close we came to WW3 (financially speaking that is).


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