The effective collapse of debt talks between Greece and its creditors with the departure of the International Monetary Fund from the negotiations should have hit the euro hard.
Instead yesterday’s announcement that the IMF representatives had returned to Washington caused barely a ripple in the currency markets.
The euro closed on Thursday at 1.1258. As of 1:30 pm today it was trading in New York at 1.1269. Today’s big move in the euro was higher in reaction to a sharp drop in the Dollar Index mid-morning which forced the euro up over 60 points to 1.1297.
After falling 20 percent against the dollar from last May to January, the euro has been marking time this year trading between 1.0500 and 1.1500 overall and, since the beginning of May, between 1.1000 and 1.1500.
This complacent situation is ripe for change.
If Greece leaves the euro or is forced out, if its banks impose capital controls, or it defaults on IMF payment at the end of the month, or any one of half a dozen other scenarios occur, the results of which are unpredictable, currency markets will react and the euro will plunge.
In the meantime markets are operating on one basic assumption. Rhetoric and intransigent posturing aside, the Greeks and the Europeans, will, somehow and probably at the last second, find the formula to keep Greece within the euro.
In market terms a Greek solution that maintains the status quo is priced in, everything else is not.
No one as yet believes that the Europeans, particularly the Germans will let the dream of a united Europe die. Athens will receive enough funds to maintain the fiction it is the capital of a sovereign nation. European banks and institutions will receive back their own bailout cash so they can pretend that their taxpayers are not liable for 240 billion euros in Greek loans. Neither side will mention that Greece will likely need another bailout before the end of the year.
For the markets, the largest part of the problem with Greece is that the conditions and ramifications of a Greek default are unknowable. Markets cannot trade what they cannot imagine.
Maybe European politicians and bankers are correct. Maybe the European financial system has been insured against a Greek default. Maybe the economic catastrophe in Greece that would surely follow an exit from the euro will not bring recession and unemployment to the rest of Europe. And maybe that recession will not travel around the globe. Maybe, and hopefully but not assuredly.
Markets await a concrete development. The past five years have been an endless round of threats, pique, bluster and conciliation between Greece and its European creditors. Traders want something real, something that indicates a likely outcome, before they move.
If that outcome becomes a Greek exit, markets will shed complacency in an instant and the euro will suddenly have no floor.
Chief Market Strategist
WorldWideMarkets Online Trading