In a word, not yet. Yes, EURUSD gapped down at the Sunday open - the low was 1.0955, since then the EURUSD has managed to retrace 50% of the decline and is now testing 1.1060. Considering Greece’s position in the currency bloc is in the balance and default hangs like Damocles’ sword over Tsipras’s and co.’s heads, I can’t help but be impressed by the single currency’s relative “resilience”.
Can markets get over the Greek crisis?
There is an air of inevitability in the markets today that the endgame has arrived. Greece is likely to be booted out of the currency bloc, but the Eurozone will survive. That doesn’t mean that all is well, however, markets are waiting to hear updates from Greece to find out: 1, will they default on Tuesday or 2, will they be offered debt relief. Hence the mini recovery in the markets so far.
Maybe one reason for the relative calm is that reports suggest that the European Commission offered Greece debt assistance/ relief late on Sunday. We still need to hear more about this, but the latest news reports suggest President Obama and the US Treasury Secretary have also made calls to Merkel and Hollande to reduce Greece’s debt burden. If this can happen quickly enough then will Greece have to default tomorrow?
Believe it or not, but uncertainty in the market is actually keeping things fairly calm early on Monday, but we would note that EURUSD volatility spiked to its highest level since 2011 earlier, so one rogue headline could see risky assets take another lurch lower (EUR included).
The rush to safe havens:
EURJPY has fared the worst, it is down some 1.5% since the open. This is not unexpected since the JPY is considered the ultimate safe haven. But even this pair is making a comeback today, and found support at the 100-day sma at 133.53. The Swiss National Bank (SNB) announced that it had intervened overnight to try and stem the safe haven flow into the Swissie. 1.0314 was the low, but even after intervention, EURCHF is still below Friday’s high.
EURUSD volatility surged to its highest level since 2011 in the immediate aftermath of the news; however, it has backed away from these 4-year highs since the European open. Overall, this tells us a couple of things, on the one hand the fundamental bias for the EUR remains bearish as we await further Greek updates, and one rogue headline could send the markets into another tailspin; however on the other hand the EUR may not come under sustained pressure until we see contagion spread to other markets.
Grexit not a cause for contagion right now:
Although Greek events take the Eurozone into unknown territory, the real risk was the fallout to other countries. However, the contagion effect so far has been limited at best. Italian and Spanish yields have been drifting higher in recent days but after jumping on the back of the news about Greek capital controls they are now retreating from recent highs. German bunds remain safe haven flavours of the month, but until we get another dire Greek headline even German bund yields could stabilise.
How bad is this for Europe?
Some news reports have called events in Greece, Europe’s Sarajevo moment (when Archduke Franz Ferdinand was assassinated leading to the outbreak of the First World War 6 weeks later). We don’t think that we are at this stage yet, however if another European state gets into trouble in the coming months or years then Eurozone exit is likely to be priced in fairly quickly.
For now, the market is obviously concerned with what is going on, but it is willing to sit back and wait to see how this plays out. After all, there’s still a referendum in Athens that is scheduled to take place next Sunday, and we haven’t heard from the Eurogroup or European Commission to see if debt forgiveness is a real possibility. Until then watch this space…