17 February 2015
Sales Trader, Client Trading Services, Saxo Capital Markets
Markets are preparing for a showdown this week as Greece's new government and European leaders try to thrash out a new bailout agreement for Athens. This is a precarious time for EURUSD traders with a potential Grexit on the cards.
Greece's new left-wing government is on a collision course with its international creditors over the terms of a new bailout deal which could disrupt markets and even threaten Greece's future in the Eurozone.
European leaders have struggled to reach an agreement. On Tuesday, the Athens stock exchange rose 9.8% after news that a preliminary agreement had been reached regarding a four month €7.2 billion loan agreement for Greece. However, there is still a great deal to discuss regarding the reforms presented by Yanis Varoufakis, which the IMF, ECB and Germany's Bundestag all voiced scepticism about.
The new Greek government has strived to differentiate itself from past governments and is instead looking for this four-month loan deal to be viewed as a freeze on austerity. However, the Bundestag in particular may see this is a "no strings attached" deal which allows Greece to get away with receiving money and not meeting its obligations under the existing bailout agreement.
The market has been held tightly in anticipation of a conclusion to this entire situation, but time is running out for Greece. The country's current bailout expires on February 28th and any new agreement would need to be approved by the Germans. Chancellor Merkel faces opposition not only from her own CDU council but also from Alternative fϋr Deutschland party who have risen domestically on a wave of Euroscepticism.
Greece's prime minster Alex Tsipras's pledged to end austerity in Greece after his Syriza party won parliamentary elections in January. Photo: Shutterstock
In the past, a Greek exit from the Eurozone seemed unthinkable as leaders have always found a way to strike a last minute deal. Although an agreement is more likely than any other outcome, given Syriza's strong opposition to austerity - which it vowed to end once in government - it is becoming clear that something further has to give here.
Greek prime minister Alex Tsipras maintains that if the proposed loan deal is achieved, Greece would become an entirely different country by the end of the year. Quantitative easing would introduce further buoyancy to economies in Europe whilst a bridge programme would ultimately put in place a new austerity package that all sides, including Germany, would be content with.
What does this mean for traders?
The stalemate over Greece has caused EUR/USD to trade essentially sideways, keeping in largely tight ranges. Although a move down to 1.1279 occurred on Friday, previous optisism has led the pair to trade above the 1.1400 figure at times. There are two scenarios for EUR/USD exchange rate:
- If talks breakdown on Friday we could see extreme swings in EUR/USD exchange rate and a move lower as uncertainty sets in. Greek banks are already haemorrhaging deposits at a phenomenal rate of EUR2 billion a week. According to reports, Greece could run out of cash to use as collateral against new loans within 14 weeks. So the longer talks continue, the weaker Greece's financial position will become.
- If an agreement is reached between the two parties, we could see EUR/USD strengthen marginally. However, any buoyancy in EUR might not be sustained for long. Should the Eurogroup agree to Greek demands the organisation's credibility could be damaged, whilst the market may continue to see the continent as burdened by Greece somewhat. If this is the case, the EUR might not strengthen against USD until there are visible signs of renewed economic health.
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