Those with euro payments should stand ready for higher rates and volatility as currency markets digest news the ECB has introduced capital controls on Greek banks.
"But next Sunday is decision time for the Greek population. And personally, I’m glad it is. Frankly, I’m fed up with this Greek drama" - Erik Nielsen, UniCredit.
"Please ensure you monitor your positions carefully, and if you are looking to amend stops please ensure you have sufficient funds on your account." - IG ahead of what promises to be a rollercoaster of a day for traders.
The pound has fallen back to levels seen at last Friday's close against the euro as the currency markets digest the latest happenings with regards to Greece.
Ahead of the London open Pound Sterling Live was quoting the inter-bank pound to euro exchange rate above 1.42 and we saw the potential for the pair to hit 1.43 possible.
However, the euro has since staged a recovery and has recovered lost ground forcing GBP-EUR back towards 1.4125.
The average high street bank quote we are seeing is at 1.3728 but expect the spreads on the market to widen SUBSTANTIALLY as market volatility rises and FX delivery become harder to price.
However, a leading independent FX provider is telling us they could quote GBP-EUR at 1.3951 for retail international payments and there is certainly the potential for the best level on payments since 2007 on the cards over coming days. Ask your provider to ensure spikes to levels above 1.43 are executed via a buy order placement.
The euro has recovered in admiral fashion - a reflection of just how hardy this currency is. It also tells us something about how potentially insignificant Greece is to the shared currency.
"Part of the reason that the euro has not weakened extensively over the last month is related to investor positioning among hedge funds. Over recent weeks, these investors have been reducing their underweight euro versus the US dollar trade to await a period of stability before re-establishing the same trade as the Fed begins its rate tightening cycle, most likely later this year, to take advantage of the widening interest rate differential," notes Jaisal Pastakia at Heartwood Investment Management.
Importantly, the euro also has the fundamental support as sovereign financing across the broader eurozone economy is much more stable in 2015 than in 2011, when concerns around a break-up of the single currency manifested itself into asset prices.
Foreign investors (i.e. US pension funds) fled the market during the sovereign crisis in 2011, but this time around overseas institutional money remains invested, which is helping to stabilise financing costs. Ten-year bond yields in Spain and Italy are currently 2%-2.5% versus 7.5% at the height of the crisis in 2011/2012.
"Today, the ECB acts as a credible backstop, both as a significant buyer of eurozone sovereign debt and also as a facilitator of low cost financing to banks. Money market rates have moved relatively little during the latest crisis - low interest rates remain an important stimulus for the real economy across the eurozone region, as evidenced by ongoing data trends. Moreover, the ECB has stated that it will use all tools available “within its mandate” to limit contagion and maintain financial market stability," says Pastakia.
Nevertheless, it is far too early to suggest it will be business as usual from here. Indeed the only guarantee is volatility.
Richard Franulovich at Westpac in Sydney notes the stakes are still high:
“On Friday night Greece PM Tsipras announced plans to hold a referendum on 5 July on whether to accept austerity measures required by creditors’ in exchange for aid. 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: 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.
“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.”
We are meanwhile seeing the pound to euro rate about to test 1.43 as the recent sideways range is broken. Moves higher are our preferred stance at this juncture purely based on the amount of uncertainty at present.
From the Highest Level
"As I have argued all along, the final decision whether Greece stays or leaves lies with the ECB and their willingness to provide money to the Greek banks via the ELA. Of course, the Greek government can decide to leave, but knowing that that’s political suicide, they won’t make that decision, as indeed now shown with Tsipras’ claim. And while it’s formally a technical decision whether to provide the ELA (it’ll take a 2/3 majority of the ECB’s GC to cut it), that decision will not be taken without political cover at the highest level," says Erik F Nielsen at Unicredit.
"But next Sunday is decision time for the Greek population. And personally, I’m glad it is. Frankly, I’m fed up with this Greek drama, created by a government apparently thinking it’s living in an isolated space, and which insists that its democratic mandate is more valid than the democratic mandate of its European partners.
"It’s now more than three months ago that I came to the conclusion that the Greek government lives in a parallel universe, so on March 15, in this note, I called on them to call a referendum on continued eurozone membership (with reforms) or a return to the drachma."
"Now, with bankruptcy looming and the financial system on life support, time has run out for an orderly exit route."
Forced Currency Conversion
"A 'no' vote makes exit the most likely outcome. As we discussed in Greece: the risk of capital controls (3 June), without the support of a programme, a potential exit scenario would resemble Argentina’s 2001-02 crisis, which also started with deposit controls but – in the absence of an internationally supported plan – rapidly deteriorated into tighter controls and a forced currency conversion," says Francois Cabau at Barclays.