Greek parliamentary election is finally here! Market has been cautious heading into this weekend as there is no clear view of how far and wide the fallout will be in the days and weeks to come, should Greece leave the EU. Market has been volatile and quick to react to the polls early on, but since the Greek government banned publication of polls for the final two weeks, market is left with the last sanctioned poll in early June which showed the two leading contenders, pro-bailout New Democracy and anti-bailout Syriza in a head to head match. There was chatter all this week long on unpublished polling researches favoring both sides, but they are were more likely leaked on purpose to boost their respective standings.
The voting will take place between 7am to 7pm local time (midnight to 12 noon ET). Exit polls will be released as soon as polls close, with official results expected around 14:30ET. Market is expected to react violently should the official results point to an imminent Greek Exit. As it stands, the Syriza party is still firm on the stance that Greece must remain in the euro zone while demanding a renegotiation of the bailout conditions, especially in light of the recent “banking aid” of Spain. Syriza leader Tsipras insisted that his party would not form a unity government or coalition government with pro-bailout parties. The New Democracy party leader Samaras, on the other hand, warned Greece that this weekend’s election is basically a choice between the Euro and Drachma, and an EU exit would take Greece back 50 years… Samaras also reiterated that EU has already accepted the fact that changes needed to be made for the Greek Bailout package.
To make matters worse, Germany reiterated for Greece to remain in the euro zone, it would have to respect all prior bailout conditions as they were. German press sources stated that if the terms of the bailout were renegotiated, Greece would need a third bailout to cover the funding gap created by a longer period of austerity and structural realignment. Bundesbank President Weidmann also chimed in and said that allowing Greece more time to reduce its deficit would actually be harmful for the euro zone, referring to the uncertainty factor.
In Europe, the Eurogroup offered Spain up to €100B to recapitalize its banks with no austerity demands or policy changes, and Spain accepted the deal with plans to formally make the request on June 21. Fitch and Moody’s decided to dial-up the rhetoric and pre-empt their messages on potential sovereign ratings cut prior to the Greek election. Fitch stated that Portugal, Spain, Italy, Cyprus, and Ireland will face sovereign downgrades, while Moody’s went ahead and cut Spain’s sovereign rating by several notches. Elsewhere in Europe, Cyprus is reported to require a bailout before the end of the month (June 30th is the regulatory deadline to recapitalize Cyprus Popular Bank). The CPB needs €1.8B to fund its shortfall (approx 10% of GDP). In addition, Cyprus also has €2B of sovereign short-term debt maturing next year. It was suggested that an aid request to the EU may be seen this weekend or next.
In China, mixed May reports confused the market this week as much better than expected trade figures ($18.7B versus $16.2B expected) but slightly weaker industrial production, retail sales, and consumer price index provide no directional bias. Market remains supportive for risk appetite as recent measures out of China and the general sense of fatigue over risk aversion kept commodity currencies afloat.
In UK, the Bank of England took steps to prepare the British banking system for more turmoil by activating the Extended Collateral Term Repo (ECTR) lending facility, which was set up late last year. The scheme will inject an estimated £80B into banks over time, essentially increasing their APT (Asset Purchasing Target) beyond the estimated of even the most dovish analysts. The loan scheme will lend on assortment of assets at 25 bps above the current rate for a period of 6 months, thus providing enough liquidity until the Greek saga is over…
In U.S, weak data added momentum to the speculation that the Fed could announce new stimulus action next week at the FOMC meeting. Considering the headline May Retail Sales came in negative for the second consecutive month (-0.2% versus 0.1% expectation) and the preliminary University of Michigan consumer sentiment index tumbled to its lowest point this year (74.1 versus 77.5 expected), all following the 69K NFP release for the same month (average 3-month NFP is at 87K), it is no surprise that the pressure is on the Federal Reserve to do something soon…
In New Zealand, RBNZ decided to keep rates unchanged but stated that “a stimulatory policy stance is still needed to support the economy”, while Governor Bollard commented that “RBNZ has the scope to cut rates but does not plan to do so at the moment…”, practically setting the stage for a future rate cut. As a matter of fact, analysts are now predicting a one in three chance (33%) that RBNZ will cut rates in 2012.
In other markets, investors saw the Spanish 10-year yield crept higher all week and briefly tested above 7% on Thursday, with Italian yields not far behind. Analysts warned that the bailout was in reality merely an attempt to buoy Spain’s banks ahead of the uncertain Greek elections on Sunday. Press reports citing anonymous officials suggested that G7 and/or G20 central banks were preparing coordinated action contingency plans to cope with any fallout from the Greek poll.
In conclusion, we are heading into a highly uncertain market come next week, with Greek election hanging in the balance. I believe unless there are explicit confirmations that Greece will exit the EU, EUR should be a buy on dips… This is based on the recent market fatigue over the Greek saga and the fact that we’ve seen more volatility with the Euro when it comes to good news (Spanish Bailout) versus bad news (Spain sovereign ratings downgrade). I believe that the market has already priced in most of the negativity, therefore unless Greece confirms that it will exit the EU, we should be looking to buy on dips. GBP is likely to follow the EUR, although the re-activation of the ECTR has added some pressure to the Sterling… I’d still be looking to buy on dips, but will keep a close eye on the Euro. CAD is likely to remain strong, especially considering the potential Fed action scheduled for mid-week. I’d be looking to SELL USDCAD on any rallies… AUD and NZD are likely to be resilient, as we may see both currencies react to news out of Europe… I believe on a positive outcome, both currencies are going LONG; on a negative outcome, then anything could happen as they are driven largely by risk sentiments (Note: Due to recent RBNZ change of tone, we could be looking to BUY AUDNZD as the pair could once again test the 1.3200 level, especially in a risk appetite driven market.) CHF is likely to remain neutral, but should gain against USD, especially considering the soft tone expected from the Feds this week. JPY is likely to remain resilient, potentially strongest currency out of the majors this week, as speculation for a joint JPY intervention falls. USD is likely to remain weak until FOMC Meeting, although the final direction will depend on FOMC Statement and Bernanke’s comments… I’ll recommend to use caution.
We have a busy trading week ahead of us, here are the tradable releases:
Make sure to follow the links for detailed strategies and trade plans for these releases,
Forex Market Review And Upcoming Forex Calendar June 18 ~ 22, 2012
June 16, 2012 by 4 Comments