The Greek Deal That Wasn’t Makes for Tense Weekend

A Greek opposition party pulls the rug out from under the supposed bailout deal – welcome back, headline traders! Also – the market heard Japan’s FinMin loud and clear as USD/JPY still elevated despite risk hiccup today.

After a Greece bailout deal seemed rather official yesterday, (there was the dangling caveat on the Troika side that Greece still had to come up with EUR 325 million in further cuts, but it certainly appeared to be a deal and was being celebrated as one) one of the ruling Greek coalition party leaders rebelled on the deal today, saying the required austerity measures were too extreme. This kind of rhetoric: “Clearly Greece can’t and shouldn’t do without the European Union but it could do without the German boot.” from the rebelling Laos party leader Karatzaferis suggests how the bailout deal is perceived in the popular mind as a strict imposition from Germany, more than the EU per se.

The overall Greek hostility and degree of social unrest is a risk as well, as evidenced by the latest riots and the police union threatening to arrest Troika leaders responsible for trying to impose the austerity measures on the country. It is so clearly unsustainable – and yet will this be realized now, in coming weeks/months or not for another year or two? Even with the current bailout deal, the projection is that Greece would remain saddled with sovereign debt of 120% of GDP by 2020 (probably even with over-optimistic projections) How is this possible when they are offered a 70% haircut on their debt?! Certainly the Greek status within the EU is very tenuous. Please have a look at this Der Spiegel post that comments on the situation and gathers comments from a number of German and other sources. The bottom line is that “either the EU needs to accept a Greek default or the country needs to leave the common currency.”

In any case, EUR/USD turned south on the news and as I discussed yesterday, even the purported signing of the deal didn’t provide compelling logic for a sustainable EUR rally in the first place. When the EU works so hard to save the Greek basket case – we can imagine what lengths they will go to if a real contagion situation gets underway to one of the countries closer to the core. Portuguese sovereign yields dropped strongly today, but Spanish and Italian yields were up sharply. Technically, the move in EURUSD well back below the 1.3200/40 zone is a bearish development, with the caveat that we are in a headline-trading market.

Overall, the most interesting market stressor for the major currencies today was provided by a bout of risk aversion and it’s no surprise to see the USD plowing a path through the rest of the G10 on that developments, with a bit of a tailwind from the Japanese Ministry of Finance (more on that below).

Odds and ends
The RBA pulled a fast one overnight, lowering its growth and inflation forecasts just after a meeting in which the bank surprisingly decided not to cut rates.2-year Aussie swap rates tumbled 12 bps on the news. This sent AUD crosses tumbling, particularly AUDUSD as risk appetite turned south today as well. Interesting to have the 1.0760 area not holding in that pair – this could be a significant top if that level cannot be re-obtained, in which case the 1.0400 200-day moving average is the next big focus lower.

The MoF’s Azumi said that he would like to seek other countries’ cooperation on FX intervention, but that Japan would not hesitate to intervene to counter speculation. It’s interesting to see Japan making such direct statements despite the much weaker path of the JPY in recent days in most crosses. Yes, the USD did post very low levels vs. the JPY a week ago, but other JPY crosses have been flying. Could Japan be ready to move again? Certainly – as USDJPY is always the main focus. Remember that the largest bout of JPY intervention took place on Oct 31 of last year, when USDJPY had fallen to below 76.00. But while the USD was very weak across the board, the JPY was rather weak as well, with the likes of EURJPY and AUDJPY at local highs when the intervention took place. It is clear that USDJPY is the focus, and the desired floor may have moved up over the last couple of days after the pair flirted with 76.00.

Looking ahead
The weekend could be a long one for Europe – stay tuned and be ready for ad hoc, headline driven reactions. A longer term perspective is probably the better one to take – looking beyond a Greece default or non-default.
Be very careful out there and have a wonderful weekend.