Hope springs for Greece

The saga continues, today is now considered D-day and the last possible date for an agreement to be reached so that Greece avoids default and stays in the Eurozone. During the weekend there were some key developments:

• A new reform plan was proposed by Greece, this is said to have included plans to scrap early retirement options from next year, an increase in income tax for high-earners, and a levy on companies with annual revenues of more than EUR 500K.
• Greek PM Tsiparas has spoken to France’s Hollande and Germany’s Merkel on Sunday to brief them on his latest plan.  These talks were considered pivotal and must have been at least moderately successful as Tsiparas is travelling to Brussels on Sunday night to meet with European leaders on Monday.
• Merkel reportedly said that she wanted a definitive solution to the talks this week, which suggests that the there are no more cans left to kick down the road.

I’ve been around long enough to know that Greece has been in this position before, and just because both sides seem to be on the path to compromise doesn’t mean a deal will actually be struck. We are also used to hearing that the next set of talks are absolutely the last chance before D-day will hit. In our experience these talks always go down to the wire, so even if Monday ‘s talks fail both sides could eke out more time ahead of 30^th June, the day that Greece is expected to run out of money.

So what does this mean for markets?

At the early market open on Sunday, the EUR gapped higher by approx. 30 pips, suggesting that the FX market was warming to new proposal from Athens. Earlier on Monday the EUR reversed earlier gains on thin liquidity as people stayed out of the market, preferring to wait for the outcome of today’s meeting. However, some positive comments from the likes of Angela Merkel an d news that the ECB will continue to support Greek banks has helped sentiment towards the EUR, and EURUSD is back around the 1.1350 mark. We expect relatively little movement until the outcome of today/ tonight’s summit is known.

We have mentioned before about the stability in the spot FX market, where the EUR actually finished last week higher vs. the USD. However, the options market has seen enhanced levels of volatility in EURUSD 1-month options in recent weeks. This means that although the EUR is managing to remain stable – and even rally – during this tense period of negotiations, it still may fall off a cliff in the event that no deal is reached and Greece does default and face expulsion from the currency bloc.

Over the next week, as we wait for a deal to be reached between Greece and its creditors, EURUSD is likely to remain range bound between 1.1220 – the low from Thursday and 1.1450 – the high from last week.

Although Greece is likely to dominate things in the FX market in the coming days, watch out for a sneaky resurgence in the USD. Any post-Fed recovery could be selective, and the dollar may still struggle vs. the EUR as the bulls get ready to pounce on a positive outcome for Athens.