The second Eurogroup finance ministers meeting in less than a week got under way earlier, Greece is 12 days away from the end of its current bailout, and could be left with no source of external financing on the 28th Feb. To ensure that there is time for member states parliaments to agree an extension or any changes to the current Greek bailout, a decision needs to be made today. Although the markets are remarkably calm on this President’s Day, this meeting could decide whether Greece defaults on its loans and, ultimately, if there is a Grexit.
The rhetoric coming from Eurogroup finance ministers as they made their way to the meeting does not suggest that a deal will be forthcoming. German, French, Austrian and Irish ministers went into the meeting saying that that they want an extension to Greece’s current bailout plan (read: they want conditions and austerity). However, the new Greek government is standing firm, over the weekend Greek newspapers reported that 75% of the Greek people agree with new PM Tsipras and co’s tough stance at these meetings, and a similar number expected the new PM to succeed in getting what he wants.
Austerity vs. Eurozone membership
But even though the majority of Greek people may favour the stance of their government in these negotiations, approx. ¾ of Greek people wanted Greece to stay in the Eurozone ahead of last month’s elections. Something’s got to give, as the Eurogroup are likely to tell Greece that they can’t have one without the other…
Although the rhetoric is heating up, the markets are incredibly calm today. Volatility in EURUSD has fallen 20% since the Greek election in January, and EURUSD remains above 1.14 as we wait for the outcome of this meeting. The S&P 500 made a fresh record high at the end of last week, and even though Greek bond yields have been rising on Monday they remain below the peaks of last week. The market certainly isn’t in panic mode right now. Either the market thinks that a deal will be reached, and thus it may be too complacent in case one can’t be agreed, or the market thinks that a Greek default and eventual Grexit is perfectly manageable.
Who cares about Grexit
We tend to think that it could be the latter. The ECB has embarked on QE, albeit not yet tested until March, the institutions of the Eurozone have strengthened since the first eruption of the sovereign debt crisis, and there has been no contagion (as yet) from Greece to the other peripheral nations. This is keeping the markets calm so far, as is the better tone to the recent economic data. German GDP surprised to the upside for Q4 2014, while the Eurozone’s trade surplus rose to a record high in December.
The trade surplus is worth noting, as it is both good and bad for the EUR. While a surplus country or currency bloc should find that there currency is more in demand than, say, a deficit country, this is not always the case. Hence EURGBP is close to 7-year lows even though the Eurozone has a trade surplus and the UK has a large trade and current account deficit.
There are opposing fundamentals for the EUR, on the one side there is Greece, while on the other there are the positive public sector finances. However, if a Grexit is not considered a mortal threat to the future of the Eurozone then this week’s upcoming economic data, including the flash readings for Feb PMIs, is likely to determine the next phase for EURUSD.
EURUSD: The technical view:
The short-term outlook for this pair has changed to become constructive. It broke short term resistance at 1.1359 – its declining trend line – which improves the short-term technical picture. This is now key support. On the upside, a move towards 1.1530 may be on the cards, but first we need to get above the high from 13th Feb at 1.1443.
The longer term picture for EURUSD remains weak, and we would expect any strength to be temporary. The latest positioning data from the CFTC showed that EUR short positions are starting to level off after looking particularly stretched to the downside in recent weeks. However, we still don’t think that people are ready to put on EUR longs with all of the Greek uncertainty hanging around. This also supports our view that any upside in EURUSD will be temporary, so any rallies towards 1.1550 could be faded by the market in the coming days.