“In sum, a very significant period of uncertainty has now been initiated. The question of Greece's Eurozone membership has been officially opened.”
Those watching the currency markets with euro-related payments are about to enter a period of extreme volatility as the Greek crisis finally reaches a critical point.
At the Asian open we are seeing the GBP-EUR gap higher to its best level since 2007.
The euro dollar is down to 1.1017.
After an extraordinary weekend meeting the ECB has decided to freeze the level of ELA funding to Greek banks at Friday’s levels just shy of EUR89bn.
"Combined these developments substantially raise Greek tail risks. We expect a very strong risk averse tone to pervade global markets as soon as Asian opens for trading and throughout much of the week," says Richard Franulovich at Westpac in Sydney ahead of the Asian open.
Futures markets are showing a whopping slump in the FTSE 100 by 3.18%, the German Dax will bleed an incredilble 4.48%.
"We expect a very strong risk averse tone to pervade global markets as soon as Asian opens for trading and throughout much of the week: equities lower (perhaps 2-4% for key markets), bond yields lower (perhaps 15-25bp for core markets) and the likes of the USD, JPY and CHF to be very well supported (perhaps +1 to 2% against G10 peers).
"EUR/USD will likely trade down to 1.10 early this week though with higher yielding and EM currencies likely to fall as well EUR may “perversely” rise on some crosses."
Franulovich says fear and uncertainty over the consequences of next week’s referendum will of course see Greek depositor withdrawals accelerate sharply.
With ELA funding frozen at its current EUR89bn level it is very likely the Greek banking system will not have sufficient liquidity to meet these withdrawals.
Speaking a little after midnight on Friday on national television, the Greek Prime Minister announced that a referendum is going to take place in Greece on Sunday 5th of July.
The vote is widely seen to be a referendum on Greece’s membership of the euro.
“In sum, a very significant period of uncertainty has now been initiated. The question of Greece's Eurozone membership has been officially opened,” says George Saravelos at Deutsche Bank.
From a currency perspective we believe this will ignite significant volatility into the euro exchange rate complex as markets hate uncertainty.
For now the implications are seen as being negative for the shared currency and as such we forecast the potential for the pound to euro exchange rate (GBPEUR) to break above the 1.4250 level.
The euro dollar rate (EURUSD) could meanwhile break below 1.10 on the uncertainty.
We would suggest that those looking for stronger rates on their international payments register their interest with a leading FX specialist who will be able to set up a buy order that will automatically trigger should the GBP v EUR level spike to fresh highs on any volatility next week. Find out more here.
The Big Problem: Banks
We are seeing worrying developments occurring with regards to the banking sector.
Queues are forming outside banks which could potentially signal an impending bank run.
We have seen an ATM run out of money and the queue move down to next bank. Radio stns broadcasting which ATMs still have cash.— Robert Nisbet (@RobNisbetSky) June 27, 2015
There is nothing like a bank run to hit home what is at stake. A banking crisis could trigger an outcome to the referendum that favours the status quo i.e a Yes to the Eurozone’s set of measures being put before the people.
We see such an outcome as being good for the euro exchange rate which could rally strongly in the wake of a Yes result.
Watch opinion polls in this regard.
At the time of writing the actual question has not been released, but with Tsipras saying he will urge a ‘No’ to the Eurogroup’s proposals (i.e austerity) we have a pretty good idea on what will be announced.
Concerning the immediate outlook, the ECB is likely to hold an emergency meeting this weekend to decide on ELA policy.
The ELA is the Emergency Liquidity Assistance facility that sees the ECB provide extra money in times of stress.
“In the event of an effective cap being set, Greek banks' access to liquidity would be restricted and cash withdrawals or deposit transfers above would not be able to continue,” says Saravelos.
Greek legislation allows either the Bank of Greece governor or the finance ministry to impose capital restrictions.
“The extent to which this materialises will depend on the ECB decision over the next forty-eight hours as well as depositor behaviour,” continues Deutsche Bank’s Saravelos.
Nevertheless, the Greek’s are trying to avoid any bank run.
"Citizens should not be scared, there is no blackmail," Panos Kammenos, head of the government's junior coalition ally, told local television. "The banks won't shut, the ATMs will (have cash). All this is exaggeration.”
Where the euro opens on Monday in the wake of what has transpired and what will surely transpire over the next two days remains anyone’s guess. Remember though you can take advantage of spikes in the exchange rate and likewise protect yourself against adverse falls.