Merkel not likely to accept a Greek haircut before the

German Chancellor Angela Merkel softened her stance regarding taking losses on Greek loans, accepting the  arithmetic  of the situation, but this new stance does not reflect her voters, says John Kicklighter of DailyFx. So, do not expect a change of policy anytime soon.

In the interview below, Kicklighter also discusses the ECB’s rate decision, market action around the fiscal cliff, and other market moving themes.

John Kicklighter is a currency strategist for FXCM in New York where he specializes in combining     fundamental and technical analysis with money management. John authors a number of regular articles for  DailyFX.com, ranging in topics from basic fundamental forecasts for the G10 economies and commodities to more complex subjects like the level of risk sentiment across the financial markets and the carry trade specifically.    John has actively traded since he was a teenager. His experience ranges from spot currency, financial futures, commodities, stocks, and options on all of these instruments for his personal accounts. John graduated from the Zicklin School of Business at Baruch College in New York with a Bachelors degree in Finance and Investment.

Merkel has certainly taken a more balanced approach when she discusses the troubles facing the Eurozone and Greece in the future. I think this is more a reflection of her appreciation about the arithmetic of the situation. Greece is unlikely to come out of this without some level of debt forgiveness as they are mired in recession and held down by a tremendous debt load. Yet, despite how much she has softened her personal view of the situation; she may represent a constituency that is not as understanding. With an important election in the second half of next year, allowing for a write off before Germans head to the polls may be extremely difficult for her and her party to swallow even if things deteriorate materially again.

The NFPs will have an even more truncated influence over the markets than usual. That isn’t to say it will be a non-event – more that it could generate more dramatic levels of volatility and find itself even less supportive of a serious trend. The timing before the Fed decision will very likely be viewed as very important factor to policy decision to investors, but it is unlikely to materially alter the course the central bank has set. With so many bigger-ticket distractions and the market focusing on the bigger picture issues, we should limit our expectations for this as a tradable event beyond leveraging or dampening prevailing trends.

It  wouldn’t  be very difficult for the ECB policy group to justify a rate cut. Inflation is rather tame for the broader region and we have seen other central banks cut with little regard to immediate price pressures. The Eurozone’s recession and high debt load would also make a rate cut an attractive move. However, the real issue comes in whether it would be effective or not. From what we have seen from countries, cuts below 1.00 percent have little material impact through the economy or financial system. Draghi and company will recognize that and the marginal, negative impact it also has on inflation. If they do cut, it wouldn’t be seen as a relief for the region’s battered markets but rather just a cut to returns when holding euro investments (euro-negative).

The Fiscal Cliff is a tricky factor. It is very appealing from a media perspective because they have something to always reference. However, it is highly likely that the government comes to some level of agreement – and before the deadline for introducing bills to the House of Representatives (the 18th). Furthermore, this looming threat curbs volatility as much as it incites it as we find capital steadily exits the market to avoid the warping influences of a year-end liquidity with the additional concerns of these systemic threats. As a trader, I would love volatility. But practically speaking, if it comes; it would likely be highly erratic and quickly snuffed out. That means chop that makes it difficult to trade from a short-term swing perspective and no clear trends for those looking for medium-term and higher trades.

There was certainly a quick, short-term impact on the Canadian dollar (and British pound) to the news that Carney would be moving to the UK. However, it quickly was lost in the normal course of trading. We have until July before the switch is made. This could have curbed any hawkishness that had translated into bullishness for the markets because he would be less likely to hike just before an exit. That said, very few were expecting he would move within that time frame. As for whether the BoC will be more dovish for his absence, the group itself seems to hold a similar view to Carney himself. The person that replaces him will likely be selected for a similar take on the future. We won’t know how much effect this has at least for a few months when names start to bubble up about replacements.