Europe: Conspiracy Theory in Action

A new season of the series has opened - is Greece going to leave Eurozone or not? In fact, no one wants it and not one believes in it either.
There are only two results of spring trades for Europe: euro-QE has produced expected results, and the Greek crisis continues its stable drift to the point of no return. CPI of key countries has already kicked back from deflation levels. Despite the shift of expectations for FRS rate increase, US dollar has grown stronger again against all basic currencies. The US statistics, practically, was weak (retail sales, CPI, GDP growth assessment, etc), but the market has been successfully kept by FOMC participant optimistic interviews.

The first summer day immediately showed market nervousness and turned out to be quite dramatic for dollar. Before PMI data were published, Fischer's speech went quite unnoticed; however, positive American statistics that was the first for several weeks reduced EUR morning positive to zero. The growth of employment component (51.7 against 48.3) was the main result in the indicator structure. The current European situation, once again, shows balanced mechanisms that produce obvious (or not quite obvious) problems, which predictably affect the market, and, at the same time, seem to be natural. This is, for instance, the case with Greece. Europe does not need expensive euro; and if it had not been for Tsipras and Syriza, something different would have certainly happened.

A new season of the series has opened - is Greece going to leave Eurozone or not? In fact, no one wants it and not one believes in it either. It is clear for everyone that Greece' pull out of the common currency will trigger a number of side effects with results that can't be predicted yet. Europe holds Greece in its sleeve as a necessary problem; however, at the right moment, one can always make a decision, and that is what the Greek government counts on now. Critical moments are usually tied up to the moments of regular debt repayments. Unfortunate Tsipras is being torn apart between nice promises given to voters and the creditors' demands. The current 1,5 billion euros is quite an unrealistic amount; Greeks will be able to reach a compromise only after they completely yield to European money-lenders. As for now, any Tsipras's statement causes only a wave of euro sales. On Sunday, Merkel and Hollande had a telephone conversation when they evidently worked out a set of consequent steps regarding Greece. We will be able to see the results until the end of the week, since Greece, technically, will not be able to receive a new ELA money tranche, if they do not reach a compromise. So far, no Trio member had mentioned about the end of the agreement search process, and the Greek Ministry of Finance declared that they will not miss the payment. Even if those are Greek fantasies, they have the right to unite all their IMF June payments and settle transaction at the end of the month. That will be a blow to the reputation but, in any case, not a default. Greece has time until the end of June (in any case), and there is always a chance to make a compromise.

G7 closest summit that will be held on June 7-8 is planning to discuss common global risks of easy monetary regulation; also, making secret agreements among the USA, Eurozone, and Japan regarding systemic weakening of dollar is expected. Also, the program will include all kind of sanctions and Greece (if no agreement is reached until then).

The agenda of the next ECB meeting will include:
- Changes regarding QE rates and volumes are not expected;
- Economic forecasts;
- Greece (on the level of comments);
- ECB response to Coeure's statement on the need to expand asset-purchases in the framework of QE.

What is to be expected from Draghi's speech:

  1. In case of unemployment level reduction, there will be less pessimism in his speech; and his assessments that are traditionally positive will add points to the QE program.
  2. Any hint at asset-purchase expansion made in the nearest future in the framework of QE will produce a strong peak with regard to EUR/USD, since large investors have a reason to fear that such measure can become permanent. Nevertheless, analysts that are accountable to ECB are active persuading that QE volume will be in strict compliance with the level stated.
  3. Greece's influence will depend on any agreement reached at the level of negotiation groups; however, even the most optimistic scenarios do not see a ready solution on Wednesday.
  4. In order for euro to grow (or have upward peaking), Draghi's clear comments will be required regarding the issue, whether ECB will consider such an agreement as the basis for acceptance of Greek state treasury bills for pledge and whether ECB will allow Greek banks to have access to QE. And again, the absence of a decision will tighten ELA secured lending.

On Monday, euro crawled down not being able to manage the psychological level of 1.100. The main sellers of the pair were pledged accounts and stops below 1.0940, which used the statistics for consolidation of penetration. Most likely, large players will hold long positions on dollar until the publication of NFP data. High demand for EUP/USD is seen at 1.0880 – 1.0950 – 1.0970, and large offers for sale - at 1.1010/25 – 1.1030 – 1.1050, which determines the possible range. For now, upward and downward targets are equally possible.

作者: Navsher Bartash,
ForexChief Currency strategist