Article / 29 December 2014 at 8:38 GMT

FX Update: Greek vote weighs on Euro in thin trading

Head of FX Strategy / Saxo Bank
Denmark
  • EUR focus on the 1.2000 level
  • AUD hits 0.8100, more downside expected
  • Greek vote today could lead to Syriza victory in 2015

By John J Hardy

The G-10 rundown 

USD: Generally still trading on the strong side, though it’s been drifting a bit weaker from the high point and needs to rally a bit today and tomorrow to finish the year on a high note.

EUR: Continues to trade heavy as Greek presidential vote to be held today and the risk that a failure will lead to snap elections early next year. A negative outcome is already priced in here, but is it fully priced in?

EURUSD: EURUSD trading down below the trendline from 2010 and the last arguable trendline in place is the one from 2005, though I still think the big focus is on the 1.2000 level and whether we simply continue to melt lower into 1.1500 early next year if the US data remain sufficiently strong and the European Central Bank moves in January.

EURUSD
Source: Saxo Bank
 
JPY: Trading passively as the latest batch of inflation and production data late last week failed to impress the market either way.

GBP: strong versus the weak euro, but not putting up much of a fight against the strong USD. The rate advantage for the UK has shrunk (in two-year swaps) to below five basis points, versus 75 basis points at the beginning of July. That’s why we’re trading at 1.55 and not 1.75 in GBPUSD.

CHF: The Swiss National Bank has seen no follow-through move on the announcement of negative rates on very large sight deposits as the move is seen as perhaps too timid to trigger much notice. If ECB gets aggressive at January meeting, the SNB is going to have its work cut out for it.

AUD: A major milestone near 0.8100 achieved — more downside in the new year.

CAD: Trading passively at weaker end of the range versus USD as oil prices remain very low.

NZD: Staying on the strong side — its strength is a real outlier and I am expecting mean reversion at some point over the next few weeks or at least sometime in Q1 (versus AUD and across the board, really).

SEK: Continues to trade weakly despite the last-ditch deal to avoid snap elections as the market mulls the Riksbank’s next steps.

NOK: Finding stability near the 9.00 level in EURNOK. NOK weakening may not be over with yet, though we’re not likely to see anything resembling the volatility of mid-December.

Sweden’s minority Social Democratic government managed to ram through a deal with the opposition to allow a minority government to pass its budget, thus avoiding the gambit by the anti-immigration Sweden Democrats to force new elections. 

The most remarkable thing about all of this is that the market has almost entirely shrugged its shoulders at these political developments, suggesting not much was priced in on the political front as the focus is instead on what plans the Riksbank is cooking up regarding the threat of deflation (as its policy rate is already at the zero bound).

The Greek parliament will vote today on whether to approve newly appointed president Stavros Dimas. It doesn’t look like he has the votes, which will mean elections early next year and a likely Syriza victory. 

Syriza is anti-austerity and, while it wants to keep Greece in the EU, it is clear that it will put up a stiff resistance to any further austerity and will likely seek some kind of major Greek debt restructuring, which is why we have seen Greek three-year yields north of 10% lately. 

Athens

If Syriza emerges to seize victory in the Greek election, the country 
will likely resist further EU-led austerity efforts. Photo: iStock

So far, the market is seeing this as entirely a “Greece only” situation, meaning that the broader euro implications are somewhat limited for now, but if Syriza eventually succeeds and successfully pushes back against the Troika, one can’t help but imagine that Portugal and possibly eventually Italy will look to do the same. 

Watch Portuguese yields as an important indicator for whether there is a contagion risk from the situation in Greece. The Greek parliamentary vote on the presidency will supposedly be held today between 10-12:00 GMT.

Elsewhere, trading is generally passive, but we could see a bit of movement despite the season — look how the 2013 calendar year closed on a high note in USDJPY, for example, before a major correction set in early in 2014. 

That’s not to say that we’ll see a repeat, but it just shows that exchange rates can certainly move at this time of the year. The focus for EURUSD is the 1.2000 level as we transition to the New Year. Besides a brief few days below that level in 2010, EURUSD hasn’t traded below 1.2000 since early 2006.

Note that the latest US Q3 GDP growth figure was revised (last week) up to a heady 5.0% annualized rate, the strongest reading in over a decade. This could be tilting the Fed toward an April rate move, particularly if next week’s employment report is as strong as, or stronger than, the November report.

The economic calendar is almost entirely barren today and tomorrow only features a US October home price index and December consumer confidence, which will undoubtedly be stronger on the “gasoline effect” as prices in December plunged well below the psychologically important $3.00/gallon level in November and December.

-- Edited by Michael McKenna

John J Hardy is head of FX strategy at Saxo Bank — the home of social trading.
4y
werdertt werdertt
open short positions in EUR / USD and do not read the news - speculators have long since decided his fate!

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